IRS, Treasury Department Propose Restrictions on Charitable Donations Used to Offset SALT Limit

August 27, 2018

On May 23, 2018, the Internal Revenue Service and the U.S. Department of the Treasury proposed new rules related to taxpayers’ ability to receive a state or local income tax credit by donating to charitable organizations.

This recent move was made in response to programs some states have created as workarounds to complying with the new $10,000 limit on state and local sales, income, and property taxes ($5,000 for singles, heads of household, and married individuals filing separately), which was a controversial element of the Tax Cuts and Jobs Act signed into law in December of 2017.

By participating in these initiatives, taxpayers could contribute to qualified charitable organizations and have their donations re-characterized as state income tax credits, which would further reduce their tax obligation.

The New Rules

Under the proposed new regulations, almost everyone who makes a donation to an eligible entity will be required to reduce their charitable deduction by the amount of any state or local tax credit they expect to receive. For example, if your state offers a 70 percent tax credit and you donate $1,000, you would get a $700 state tax credit. You’d then have to reduce the $1,000 donation by the $700 tax credit, which means you’d have an allowable contribution deduction of $300 on your federal income tax return.

The IRS would offer exceptions for dollar-for-dollar state tax deductions and in cases where the credit amounts to 15 percent or less. These proposed rules are expected to take effect on contributions made after August 27, 2018, though Treasury and the IRS welcome public comments on them.

A Local Option

One of the qualified participating charities is the Georgia HEART Hospital Program, which we’ve written about here (see the most recent blog post from May 9, 2018, for more details). A law signed earlier this year made $60 million available to Georgia residents. Donations made to a Rural Hospital Association (RHO) would be converted to tax credits for taxpayers. It’s too late to apply for the 2018 tax year, but the program is slated to run through 2021.

If you’ve completed the form required for the 2018 Georgia HEART Tax Credit but have not yet made your donation, you’re not likely to make the August 27 deadline, and may be subject to the new regulations.

We’re keeping a close watch on these proposed rules and will know what impact they’ll have on 2018 income taxes once they’re finalized. If you’ve completed the requirements to be a participant in the Georgia HEART Hospital Program this year, or if you’re considering it for the 2019 tax year, we can help you determine what the impact on your income taxes might be. Contact us anytime you want assistance with tax planning and preparation.

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