IRS Proposes Changes to Charitable Contribution Rules related to State Tax Credits

08-27-2018Tax Information

The IRS proposed legislation on Thursday, August 23, 2018 that would possibly eliminate your ability to use State Tax credits as an Itemized Deduction on your Federal income tax return. If you believe this legislation will become law, here are some quick considerations for you to make by Monday, August 27, 2018. (Yes, you only got 4 days to act)

In Arizona, this proposed legislation would impact donations for state tax credits to:

  • Qualified Charitable Organizations (formerly Working Poor)
  • Public Schools Activity Fees
  • Student Tuition Organizations
  • Military Family Relief Fund
  • Foster Care

Other states may have programs like Arizona to allow such credits.

Why is this legislation proposed?

Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017.  It included a provision to limit an individual’s itemized deduction for State and Local Taxes (SALT) to $10,000.  High income and property state residents (e.g. California, New York, New Jersey, Massachusetts, etc.) will be hardest hit.

Congress was counting on higher taxable income from these individuals with more than $10,000 SALT deductions.  Fewer deductions means more taxable income and more tax revenue.

Some states allow charitable deductions to certain organizations to be a credit (not a deduction) on their state income tax return.  The individual still pays the money; but it goes to charity, rather than the government.

That essentially is shifting a deduction from the SALT line to the charitable contribution line.  Thus, the IRS is concerned that such movement would reduce revenues projected from the TCJA tax change.

What would change?

If the legislation is passed, donations made after August 27, 2018 can:

  • still be used as State tax credits
  • still be use as charitable contributions; but only allowed to the extent the contribution amount exceeds the amount of tax credit.

The state tax credit would be treated as a quid pro quo received in exchange for the contribution and thus not deductible as a charitable contribution.

Does it affect me?

It depends if you will have more than the new $12,000 and $24,000 standard deduction limit.

Your Situation Action Required
Itemized deductions under the $12,000 or $24,000 standard deduction threshold No immediate action required.  Timing of the contribution would not impact your situation.
Itemized deductions at or over the $12,000 or $24,000 standard deduction threshold

Consider making your state tax credit deductions by Monday, August 27, 2018 in case the legislation passes. Donations made after August 27, 2018 are subject to the proposed law change.

Taxpayers will still have the ability to direct tax dollars to charities and receive the full state tax credit benefit.  The deduction just may become limited on the Federal return.  It is still a great program … the benefits may not be as fruitful in the future. 

In other words, do not stop giving to these organizations.