Taxpayers ought to wait for IRS guidance before strategizing their SALT was published by JD Supra on 6/28/18.
On May 23, 2018, IRS released Notice 2018-54 to inform Taxpayers that IRS, in the near future, will be releasing proposed regulations, to assist Taxpayers with understanding the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes – also known as the SALT deduction – which caps the deduction at $10,000.00 under the Tax Cut and Jobs Act (TCJA). Certain states have been proactive in the consideration (CA) or adoption (NY, NJ, CT) of legislative proposals that would allow Taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the Taxpayer is required to pay.
The idea that has been kicked around by some states and approved by others is that since there is no limit to charitable contributions under the TCJA, why not pursue measures that could allow Taxpayers to make contributions to charitable organizations (state run funds that finance healthcare and education as an example), and allow Taxpayers to get a state tax credit? Taxpayers would then be able to deduct their charitable contribution in its totality on their federal tax returns. These are known as “workaround strategies” in order to bypass the SALT cap.
IRS says not so fast!
IRS Notice 2018-54 instructs Taxpayers that:
⦁ Proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax purposes.
⦁ Federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law (substance over form).
⦁ IRS intends to help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes.
⦁ The U.S. Department of the Treasury and the Internal Revenue Service are continuing to monitor other legislative proposals being considered to ensure that federal law controls the characterization of deductions for federal income tax filings.
Don’t be a victim of your own making
Taxpayers in states where legislation has passed (NY, NJ, CT) ought to proceed with caution. Although the IRS has supported the full deductibility of charitable contributions to state funds in the past, the release of Notice 2018-54 could indicate that IRS might change its posture. This is supported by the concept of substance over form incorporated in Internal Revenue Code enforcement governing federal income tax treatment – not the state and local governments.
Taxpayers ought to consult their specialized tax counsel before implementing and executing specified contributions.