The Tax Cuts and Jobs Act passed and signed into last year limits the deduction for state, local and real estate taxes to a total of $ 10,000 per return.
The New Jersey legislature passed, and Governor Murphy signed the legislation to allow municipalities to set up charitable funds to allow residents to make a “so called” “contribution” of their real estate taxes so the taxpayers could get a charitable deduction for the full amount, thereby bypassing the $10,000 deduction limit.
On August 23rd, the US Treasury Department proposed regulations that these payments are not allowed as contributions because the taxpayer is receiving value and therefore the payments are not considered charitable contribution and are not deductible. The IRS announcement included the comment that if such payments were made to these “so-called” charities, then the taxpayer would have to reduce their overall charitable donations by the amounts contributed. The taxpayer can only deduct the net value of that contribution.
As an example, if a state grants an 80 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives an $800 state tax credit. The taxpayer must then reduce the $1,000 contribution by the $800 state tax credit leaving an allowable contribution deduction of $200 on the taxpayer’s federal income tax return.
These proposed regulations would also apply to payments made by trust or decedents’ estates in determining the correct amount of the deduction for the contribution.
The Treasury Department’s position is that the rules as stated in the proposed regulations are based on long standing federal tax law principles.
The states currently affected (New Jersey, New York and Connecticut) are threatening a lawsuit challenging this regulation and the limitation provision in the Tax Act. The next step is the Courts. Based on my conversations with my sources within the IRS and with other colleagues, we are confident that the states will lose their lawsuits. The efforts will be another waste of taxpayer money.
However, stay tuned. We will keep you informed.