IRS Issues Notice Regarding SALT Workaround
Earlier this month Governor Murphy signed a bill (S1893) allowing municipalities, counties, and school districts to set up charitable funds to pay for public services. Residents who donate to the funds can receive a credit for up to 90% of the amount paid toward their property tax bills and the Governor believes those contributions can then be written off as charitable deductions on their federal taxes. The purpose of the new law is to provide New Jersey taxpayers with some relief from the Tax Cuts and Jobs Act that capped the state and local tax deduction at $10,000.
Several other states, including New York, and Connecticut, have enacted similar legislation as a work-around device.
Treasury Secretary Mnuchin, as these plans are being proposed, dismissed them saying, “I think it is one of the more ridiculous comments to think you can take a real estate tax that you are required to make and dress that up as a charitable contribution.”
The IRS has followed up with IRS Notice 2018-54 advising taxpayers that the Treasury Department and the IRS intend to propose Regulations addressing the federal income tax treatment of certain payments made by taxpayers for which they receive a credit against their state and local taxes. The Notice indicates that the proposed Regulations will be “informed by substance over form” principles and advises taxpayers that federal law controls the proper characterization of payments for federal income tax purposes.
You can read the Notice as saying that the Regulations will undoubtedly deny a charitable deduction contribution to taxpayers that receive a benefit, as a reduction of their property taxes, for payments made to these entities and that regardless of what a state Governor or legislature might tell you about the deductibility of such payments, Regulations issued by the federal government will control the deductibility of these payments on a federal income tax return.
At this point it is not clear how the federal government plans to enforce the new Regulations and whether that will be by random audits or some coordinated effort to match deductions and property taxes and U.S. Rep. Josh Gottheimer, D-NJ says or the notice ‘its off to court’ where he believes NJ and other states will challenge any such regulations. If the Regulations are issued and upheld, it may be difficult for taxpayers who get caught to avoid penalties on any underpayments resulting from charitable deductions claimed in defiance of the new regs, and the chilling effect of that possibility is certainly intended by here. Stay tuned!