A Tax Payment By Any Other Name…

The IRS was never going to be fooled by these workarounds.

Governing quotes Jared Walczak, a senior analyst at the Tax Foundation, in a story discussing the Internal Revenue Service (IRS)’s plans to crack down on states creating new laws protecting their taxpayers from the adverse impacts of federal tax reform.

While the federal reform will likely result in lower federal income tax liabilities for most taxpayers, it also has the unintended consequence of raising taxpayers’ liabilities for state and local income taxes in many states – particularly states like Maryland, with significant state and local income tax rates.

While last session, Maryland lawmakers made some changes to address this reality, the General Assembly generally took a more “wait and see” approach on more substantive or aggressive changes to our state’s tax code. Now that news begins to materialize about the IRS’s efforts to pass regulations addressing the Federal Tax Cuts and Jobs Act, it seems that was, in fact, a prudent course of action.

According to Governingthe IRS is particularly concerned about approaches which allow taxpayers to avoid the new $10,000 cap on state and local tax deductions by paying overages into a state charitable trust:

Last week, the IRS announced that it would propose regulations that address attempts by states to help their residents avoid the new federal cap on state and local tax deductions. So far, California, New Jersey and New York are nearing passage of laws that would allow residents who owe more than $10,000 in state and local taxes to pay the remainder into a state charitable trust. Because charitable contributions are still tax-deductible under federal law, the state trust contribution offers residents a workaround.

This idea of allowing taxpayers to deduct all of their state and local taxes from federal income tax liability by “donating” overages to a state government “charity” got batted around a tad last session in Maryland.

Governing cites Walczak, who points out that legal doctrine generally authorizes the IRS to crack down on efforts which attempt to avoid federal tax liability by simply calling state and local tax payments “charitable deductions,” instead. To paraphrase, a tax payment by any other name is still a tax payment.

Here’s the issue: new regulations addressing charitable deductions to government organizations could place existing programs in Maryland, which have passed legal muster for years, in jeopardy. The article points to the Maryland Environmental Trust as an example. This could well filter down to the county level. The Community Foundation of Howard County, currently soliciting tax deductible donations to assist victims of the Ellicott City flood, comes to mind. If new regulations place these tax deductions at risk, even though they clearly fit under the intent of the existing charitable deduction… well, that would be a shame.