An individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any state and local tax (SALT) credit he or she receives or expects to the receive for the transfer under proposed regulations. The rules will blunt attempts by state and local governments to get around the new SALT deduction dollar limits.
Beginning in 2018, an individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or are considering adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government. 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, the IRS makes clear in the preamble to the proposed regulations (and previously in Notice 2018-54), that federal law controls when determining charitable contribution deductions for federal income tax purposes.
In light of existing case law, regulations and tax principles, the proposed regulations provide that the receipt of a SALT credit for charitable contribution is the receipt of a “return benefit” (quid pro quo benefit). As a result, if a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives (or expects to receive) a SALT credit in return.
De Minimis Exception
The taxpayer’s charitable contribution is not reduced dollar-for-dollar for any SALT credit benefit under the proposed regulations. A de minimis exception provides that the taxpayer may disregard up to 15 percent of the payment or transfer to the charitable organization. For example, if a taxpayer makes a charitable contribution of $1,000, he or she is not required to reduce the charitable deduction by $1,000 if the SALT credit is no more than $150.
These rules are proposed to apply to contributions after August 27, 2018.