The United States government hit New Yorkers and other residents of high tax states hard with the new tax law. The Tax Cuts and Jobs Act (TCJA) included a provision that put a limit on the state and local tax deduction. This limit meant residents of high tax states could only deduct up to $10,000 of their state taxes from their federal returns.
New York lawmakers fought back. In addition to joining a lawsuit against the federal government to fight the legality of the cap, they also put together a work around that allowed residents to get additional credits and help better ensure their federal returns reflected savings for the SALT payments.
What was the work around?
In New York, lawmakers put together a charitable fund. Residents had the option to donate their SALT payments to the fund and the state would provide tax credits for 95% of the contribution.
Essentially, this meant the resident paid their SALT bill while being able to take a charitable donation deduction on their federal returns.
Did the IRS accept this tactic?
No. The Internal Revenue Service (IRS) recently issued final regulations that essentially allow states to provide residents with a tax credit up to 15% for donations to the charitable funds. This defeats the purpose of allowing the residents to pay their SALT bill through donations to these funds.
The agency stated the response is in line with the basic tenants of tax law. It pointed to the fact that donations are only deductible if the donor does not receive a significant benefit as a result of the donation. State representatives counter SALT credits have been used to incentivize charitable donations for decades. These are the main arguments behind the lawsuit is in progress to determine the legality of the SALT deduction.
What about those who used this work around on their 2018 tax returns?
New York’s program was successful, residents reportedly donated an estimated $93 million to the state’s Charitable Gifts Trust Fund. Although the IRS included safe harbor regulations, they only apply to contributions made after August 27, 2018.
The IRS may contact taxpayers with questions about this and other tax planning strategies. The attorneys at Goldburd McCone can help develop a strategy to better ensure your interests are protected.