The Department of the Treasury and the IRS have issued some clarification on proposed regulation changes covering deducting charitable contributions when there’s also a state or local tax credit for the same contributions.
While the IRS says the regulations are meant to “clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions,” critics maintain the change is meant to retaliate against the states of New York, New Jersey and Connecticut for attempting to provide relief for the newly placed cap on deductions for state and local taxes paid.
In its release, the IRS frames the regulations this way:
“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 also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.”
Exceptions are provided for dollar-for-dollar state tax deductions and for tax credits that are no more than 15 percent of the payment amount or of the fair market value of the property transferred.
“A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150,” the IRS said.
The complete set of regulations can be found on the Federal Register website. The site also has complete details on submission of public comments.