The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently finalized the federal government’s answer on the charitable contribution work-around certain states have attempted to implement to reduce the effect of the cap on state and local tax deductions for federal filing purposes. Citing Internal Revenue Code section 170, the IRS determined that contributions made by taxpayers to a fund or entity designed as an alternative to paying property taxes, for example, is not a charitable contribution, because the donation is not made with a charitable intent, and the taxpayer receives a privilege or benefit in exchange for the donation.
Under the new guidance, taxpayers may still deduct a portion of their charitable contributions to state and local tax credit programs on their federal taxes, but only after reducing the deduction by the amount of benefit they receive for the contribution. There is an exception for certain contributions where the credit does not exceed 15 percent of the taxpayer’s payment of 15 percent of the FMV of the property transferred. A safe harbor for qualifying individuals has been proposed in IRS Notice 2019-12, available here.
To read the press release about the finalized regulations, click here.