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New Charitable Contribution Limits for SALT Credits

Final Rules Limit Charitable Contributions Made for State and Local Tax (SALT) Credits

The IRS has issued final regulations that require taxpayers to reduce the amount of any charitable contribution deduction by the amount of any SALT credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Internal Revenue Code (IRC) Section 164. The final regulations and the safe harbor applies to charitable contribution payments made after August 27, 2018.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments adopted laws allowing individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes. Regardless of state and local law, however, federal law controls when determining charitable deductions for federal income tax purposes.

Return Benefit

The final regulations generally adopt the rule in proposal regulations that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). A taxpayer who makes a payment or transfers property to IRC Section 170(c) entity, must reduce any charitable contribution deduction for federal income tax purposes if he/she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, a taxpayer must reduce the charitable deduction if they receive or expects to receive state or local tax deductions in excess of the payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15% of the taxpayer’s charitable payment. The
15% exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15% of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12, providing a safe harbor for certain individuals if any portion of a charitable contribution deduction is disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under IRC Section 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their 2018 tax return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

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