Sept. 21, 2018 – The U.S. Treasury Department and the Internal Revenue Service announced draft regulations designed to change how the federal government will treat donations to charitable organizations that generate state or local tax credits. The proposal would address New York’s new tax laws that seek to convert some state and local tax (SALT) payments (that are capped at $10,000 under the 2017 federal tax law) into uncapped charitable deductions.
The proposed regulations, if ultimately adopted after a 45-day public comment period and regulatory review process, would require taxpayers to treat the value of tax credits like other benefits received when making a charitable donation, such as subtracting the value or cost of a meal at a charity gala from the charitable deduction. As explained in the Treasury Department news release, the value of a tax credit would have to be deducted from a taxpayer’s deduction. The proposal does not apply to dollar-for-dollar state tax deductions for donations to charitable nonprofits, nor to programs that generate a tax credit of 15 percent or less.
The proposed rule does not make a distinction between government-run nonprofits and public charities; donations to either that generate tax credits would have to be reduced by the value of the credit. This would be a change from prior law that permitted full deduction of charitable donations that also allowed taxpayers to apply a tax credit based on that donation to reduce state taxes. This may impact pre-existing state tax-credit programs, although there is much debate about whether and how. The ultimate impact on older tax credit programs likely will be resolved during the regulatory process.
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The draft regulations officially published today propose changing how state tax credit programs are treated for charitable tax deduction purposed beginning on August 27. Before the regulations are adopted as final rules, Treasury and the IRS will give consideration to public comments submitted by October 8, 2018. A public hearing has been scheduled for November 5. Comments should be submitted electronically, via the Federal eRulemaking Portal (indicate IRS and REG-112176-18). See tips for submitting public comments. (From the National Council of Nonprofits.)
Doing the Math
If a state provides a 70% tax credit for donations to eligible entities (whether government run or charitable nonprofit) the taxpayer makes a $1,000 donation to an eligible entity. The taxpayer receives a $700 state tax credit.
| Current Law | |
|---|---|
| State Credit | Federal Deduction |
| $700 | $1000 |
| Effect of Proposed Rule | |
| State Credit | Federal Deduction |
| $700 | $300 |
The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer's federal income tax return.
Source: Proposed Regulations, Example 1, page 34.