Many towns across the state have high property tax rates. Limits to the state and local tax (SALT) deductions incorporated in the Tax Cuts and Jobs Act of 2017 may hit these residents and communities hard in 2019.

One example is the village of Haverstraw – on average, residents pay property taxes of about $63.66 for every $1,000 of their home value. An average property tax bill can easily surpass the set $10,000 SALT deduction cap. A proposed solution for this involved a charitable contribution workaround that is now being denied as an option.

The charitable contribution workaround

The proposed strategy was to use a charitable funding model to recharacterize property taxes as charitable gifts and bypass the SALT limitation. The process followed these steps:

  1. Make a charitable contribution to a specific state fund
  2. Earn “credit” for this contribution, up to 85 percent of the total contribution
  3. Use this credit towards their state income tax bill
  4. Only owe for the remaining “balance” of their tax bill

However, the Treasury recently issued a proposed rule that would require a taxpayer to subtract any state tax credit he or she receives from the total charitable contribution amount. This is nothing new: IRS rules have always reduced charitable deductions by the value of services or product received.

In the past, however, this reduction/subtraction did not apply to state tax credits.

The expected effect of this rule

The proposed rule would have this effect: a taxpayer makes a $20,000 contribution to a state fund and receives a $17,000 credit toward property taxes. The credit is subtracted from the charitable donation as a benefit; SALT caps limit the property tax deduction to $10,000. The remaining federal charitable tax deduction is $3,000.

How will these tax changes affect me?

If you worry about the effect of these changes and whether it is a sound move to contribute to a state fund, an experienced tax law attorney can provide guidance. Proposed rules and regulations continue to interpret the details of the tax reform package, but the counsel may still avoid an unpleasant April surprise.

At Goldburd McCone LLP, our attorneys speak to tax law issues like this one on the national news and in prominent publications. Contact us for a smart solution for your tax situation.