Proposed IRS rules affecting SALT limitations

To counteract the $10,000 State And Local Tax (SALT) limitation, some states are drafting plans for a work-around to allow their citizens to continue to enjoy the overall tax deductions they are accustomed to. They are doing it by allowing a charitable contribution in lieu of paying state and local taxes, thus shifting a portion of federal deductions from the line for State and Local Tax deductions to the line for Charitable deductions. Proposed IRS regulations would allow a charitable deduction for the transfers to a state agency or charitable organization, but only if the taxpayer did not receive anything in return.

Charitable contributions have to be free and clear in order to be deducted on your federal tax return. The rule for charitable contributions where you receive something in return, like a DVD in exchange for your contribution to PBS, is that you have to reduce the amount of your schedule A deduction by the value of whatever it is you received.

Some states are proposing awarding tax credits to taxpayers who make donations to certain funds. The IRS rules say that if a taxpayer receives or expects to receive something in return for their contribution, like tax credits, then their federal charitable donation must be reduced by the value of the received benefit. Credits are considered to be a received benefit. The proposed rules do however allow for a dollar-for-dollar state or local tax deduction. So it appears that the states will need to fine tune their mechanisms.

The rules would apply to contributions made after the TCJA and any preexisting programs crated before the TCJA. If SALT a material part of your tax planning strategy, a consultation with your licensed tax professional would be cost-effective.

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