Why ‘charitable contributions’ gained’t aid you get round SALT deduction limits
The IRS has nixed a state-led plan to offer a â€˜work roundâ€™ for SALT deduction limits
For 2018-2025, the Tax Cuts and Jobs Act (TCJA) imposes a brand new limitation on itemized state and native tax (SALT) deductions: $10,000 or $5,000 for individuals who use married submitting separate standing. The powers that be in a number of high-tax states instantly started making an attempt to â€œwork roundâ€ (which means evade) the brand new limitation.
One brainstorm was to offer people SALT credit in alternate for purported â€œcharitable contributionsâ€ to state-run â€œcharitable funds.â€ This might magically convert non-deductible SALT funds right into a deductible â€œcharitable donation.â€ Shazam! Such schemes provide residents the selection of: (1) making tax funds to state and native governments and dwelling with the federal SALT deduction limitation or (2) making what you â€” in a show of unbridled optimism â€” imagine are federally deductible funds to state-run charitable entities in alternate for SALT credit. Nice thought, proper? Not in accordance with the IRS.
New IRS laws sprint wishful considering
In an unsurprising growth, lately issued IRS laws disallow such â€œcharitable deductionâ€ schemes. Beneath the laws, the quantity that might in any other case be deductible as a charitable contribution in your Kind 1040 is mostly lowered by the quantity of any SALT credit score that you simply obtain or count on to obtain.
Nonetheless, the laws permit exceptions for dollar-for-dollar state revenue tax return deduction offers and offers that generate SALT credit that don’t exceed 15% of the contributed quantity. Extra on these exceptions later.
In any case, allowable SALT deductions for 2018-2025 stay topic to the TCJA annual limitation of $10,000 or $5,000 for people who use married submitting separate standing.
The brand new IRS laws stipulate that if you happen to make a contribution to a charitable entity, it’s essential to scale back your federal charitable deduction by the quantity of any SALT credit score that you simply obtain or count on to obtain in return for the contribution. It is a longstanding rule that the brand new laws merely restate: it’s essential to scale back charitable write-offs by the worth of any goodies obtained in return to your contributions. Nothing new right here.
Instance 1: The State of New Yorksey guarantees an 80% state revenue tax credit score for quantities contributed to a state-run charitable entity. Being an exceedingly optimistic particular person who itemizes deductions, you fortunately contribute $10,000 to the charitable entity in 2019 and obtain your rightful $8,000 state revenue tax credit score. Nonetheless, the IRS says it’s essential to scale back your 2019 itemized charitable deduction by the $8,000 credit score, which leaves you with a $2,000 charitable deduction. So that you get no federal revenue tax profit from the $8,000. Sorry.
Exceptions to disallowance rule
The brand new IRS laws grant exceptions for contributions to charitable entities that produce dollar-for-dollar state revenue tax return deductions and for contributions that produce SALT credit of not more than 15% of the contributed quantity.
Instance 2: Greenback-for-dollar deal. In your state revenue tax return, you obtain a $10,000 deduction for contributing $10,000 to a state-run charitable entity. Beneath this dollar-for-dollar deal, you aren’t required to scale back your federal charitable deduction on Kind 1040. So that you get a $10,000 federal itemized charitable write-off, however you can’t deal with any of the $10,000 as a deductible SALT cost on Kind 1040.
Instance 3: 15% credit score deal. You make a $10,000 contribution to a state-run charitable entity and obtain a $1,500 SALT credit score. In your Kind 1040, you possibly can declare the complete $10,000 as a federal itemized charitable deduction, because the SALT credit score didn’t exceed 15% of your charitable contribution.
Along side the brand new laws, the IRS additionally established a safe-harbor rule, in accordance with IRS Discover 2019-12. The safe-harbor rule permits people who make funds to charitable entities in alternate for SALT credit to deal with the funds as SALT funds for functions of claiming federal itemized SALT deductions on Kind 1040. This therapy is allowed so long as the ensuing SALT credit score is utilized, in step with relevant state or native regulation, to offset your SALT invoice.
Please perceive that the safe-harbor rule doesn’t let you dodge the 2018-2025 TCJA limitation on federal itemized deductions for SALT funds: $10,000 or $5,000 for individuals who use married submitting separate standing. See the next instance.
Instance 4: Secure-harbor rule in motion. In 2019, you pay $5,000 to a state-run charitable entity. In return, you obtain a dollar-for-dollar SALT credit score. You declare the $5,000 credit score in your 2019 state revenue tax return.
Beneath the IRS safe-harbor rule, you possibly can deal with the $5,000 cost as a SALT cost for federal itemized deduction functions, topic to the TCJA limitation for 2018-2025. Beneath that limitation, you can’t deduct greater than $10,000 for SALT funds in your 2019 Kind 1040, or $5,000 if you happen to use married submitting separate standing. So the safe-harbor rule solely lets you deduct what you might have deducted anyway with a simple SALT cost. Rats.
The final phrase
There you’ve got it. The IRS has unsurprisingly nixed state-run â€œcharitable contributionâ€ schemes which might be meant to â€œwork roundâ€ the TCJA limitation on federal itemized SALT deductions for 2018-2025. Dang it! Wishful considering is commonly contradicted by painful actuality, and that is one more illustration of that precept.