The Charitable Contribution Strategy: An Ineffective SALT Substitute
In May, the IRS announced that it would issue regulations addressing state efforts to avoid some new deduction limits enacted under the 2017 tax bill. My prior blog post on the states’ strategy is here. I have also posted my full length article, The Charitable Contribution Strategy: An Ineffective SALT Substitute, on SSRN. Here’s the abstract:
The Tax Cuts and Jobs Act has provoked a large amount of controversy, especially for a revenue bill. Though politicians and experts often spar fiercely over tax policy, the TCJA drew passionate new voices into the debate, with some citizens even taking their concerns to the streets. The close association between the TCJA and the controversial President no doubt added fuel to the fire.
Although the TCJA will, on net, immediately reduce taxes for all income groups and for taxpayers across the entire country, several traditionally Democratic states believe they were unfairly targeted by the bill’s $10,000 limit on state & local tax deductions. New York Governor Andrew Cuomo, for example, called the new limit an act of “economic civil war,” and New Jersey Governor Phil Murphy said it threw a “gut punch” at his state’s residents.
To work around the new SALT deduction limits, several states have passed legislation under which taxpayers can make nominal donations to state-controlled funds and, in exchange, receive state tax credits to apply against their tax liabilities. If this strategy works, taxpayers will have replaced largely nondeductible state tax payments with fully deductible charitable contributions.
This Article explores whether this charitable contribution strategy works and concludes that it does not. It also considers the IRS’s recent notice on the strategy and offers recommendations on how to best draft regulations. The Article also explains how regulations here may affect other state tax credit programs, including those for donations to private schools.
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