The Internal Revenue Service (IRS) has proposed regulations for implementing the Tax Cuts and Jobs Act – and they specifically target state attempts to reclassify state and local tax (SALT) payments as charitable contributions.
Tax reform capped the amount of SALT deductions taxpayers can take to $10,000 – a move of particular import in States like Maryland. Some states have considered workarounds which allow taxpayers to classify payments for state and local government services as charitable contributions, which remain deductible, with no cap.
The IRS says that’s a no-go in its new proposed regulations. From the IRS news release:
Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.
For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return.
The proposed regulations are available here. The IRS is accepting public comment on the proposed changes through October 11, 2018. Comments can be sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-112176-18). Alternatively, they can be sent by mail to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044