The Internal Revenue Service (IRS) along with the United States Department of Treasury recently issued regulations addressing state agency attempts to thwart the state and local tax deduction (SALT) limitation on federal tax returns.
What is the SALT limit? The SALT limit went into effect with the new tax law. The Tax Cuts and Jobs Act (TCJA) resulted in a $10,000 cap on the deduction. This cap was especially difficult for high tax states like New York, New Jersey, Connecticut and California.
What is the issue? The feds are voicing frustration with the attempts of state agencies to avoid this cap. One effort involved the development of a charitable fund. Taxpayers wishing to use this workaround could choose to donate to the charitable fund and deduct the donation from their state tax obligations.
The taxpayer could then also deduct this donation as a charitable contribution on the federal tax return — a deduction that did not have the $10,000 cap like the SALT deduction.
How did the IRS respond? The feds recently issued regulations requiring taxpayers who make a donation to a charitable contribution to deduct any state or local credits. So, if a taxpayer made a $15,000 contribution to the charitable fund and received a $12,000 credit for their state tax obligations they would only be able to deduct $3,000 as a charitable donation.
The agency states the move is in line with basic tax rules which do not allow a charitable deduction when the donor expects a tangible benefit in exchange for the donation.
The move shows the many issues taxpayers can encounter when trying to navigate the new tax law. Anyone that is contacted by the IRS in response to their tax filings and is concerned about a possible audit is wise to seek legal counsel to better ensure their rights are protected.