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IRS issues regulations regarding SALT cap workarounds.

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IRS issues regulations regarding SALT cap workarounds.

The IRS has recently passed legislation that reduces the amount of charitable deductions to state funds that you can claim on your federal tax return. This is in an attempt to prevent State and Local Tax (SALT) cap workarounds.

With the implementation of the Tax Cuts and Jobs Act, SALT deductions were capped at $10,000. Some states responded to the SALT deduction cap by providing a state tax credit in return for donations to various state funds. A donor could then claim a federal charitable tax deduction on the donation – an amount that could be in excess of the cap. New York and New Jersey are two examples of states that designed programs to help residents circumvent the cap.

Here’s how it worked: A state resident could, instead of paying state property taxes, choose instead to donate to a state-created charitable fund. That person could then write off the amount as a charitable donation on his or her federal taxes and get a state tax credit for some of that.

The new IRS regulation, announced June 11th, 2019, requires taxpayers to reduce the amount of charitable contribution deductions claimed on their federal tax returns by the amount of state or local tax credit they receive in return for the aforementioned charitable contribution deductions. 换句话说, taxpayers can receive a tax write-off equal to the difference between the state tax credits they get and their charitable donations. The final regulations apply to contributions made after August 27th, 2018, and are effective on August 12th, 2019.

So, 如果你, 纳税人, 做一个30美元,000 charitable donation to pay property taxes, 然后得到25美元,000州税收抵免, you will only be allowed to write off $5,000 on your federal tax bill.

The regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their charitable contribution deductions. The regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the amount transferred. For more details from the IRS, click 在这里.

The changes also affect existing programs in many states used to fund private education scholarships using the same structure as the SALT workarounds. Arizona is one of the states that for years has offered state tax breaks for charitable contributions to funds that raise money for private school tuition. To understand the new regulations and how they affect you, contact your trusted tax advisor.

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