SALT Deductions

September 27, 2018

If you live in New Jersey, you likely pay high property taxes.  You may also pay a fair amount in income tax.  The new tax law created a limitation on the amount of state and local income taxes (SALT) that can be deducted.  The cap is $10,000.  Depending on where you live, this limitation may cover, for example, one half or a third of your property taxes, but none of your state income taxes.  The states that this impacts are keenly aware of what the new tax law means for their residents and have tried to come up with work arounds.  One such work around is the idea of making contributions to a state charitable fund in exchange for tax credits.  Instead of trying to take a deduction for property taxes paid, the taxpayer would take a fully-allowed charitable contribution deduction.  While those of us in the tax business may have seen this strategy as highly suspect, others were enthusiastic about its utility as a work around.  The U.S. Treasury Department has thrown cold water on the enthusiasm felt by some.
The Treasury Department has issued proposed regulations (that means that public comment is welcome) that in essence, say that receiving tax credits in exchange for a charitable contribution is a quid pro quo that may preclude a full charitable deduction.  Directly from the preamble to the regulations: “the Treasury Department and the IRS believe that the amount otherwise deductible as a charitable contribution must generally be reduced by the amount of the state or local tax credit received or expected to be received, just as it is reduced for many other benefits.”  They go on to say that the tax credit constitutes a return benefit, or quid pro quo, to the taxpayer, thereby reducing the charitable contribution.  So no charitable contribution deduction when the taxpayer receives tax credits.  There is a de minimis rule to be aware of.  If the tax credit is no more than 15% of the charitable contribution, the entire contribution may be deducted as a charitable contribution.

If you have any questions about the SALT deductions or any other taxation questions, please contact Scott Novak at (973) 228-9900, ext. 215.