Double dipping is uncouth when it comes to sharing food. But when it comes to tax laws, it’s typically prohibited – at least most of the time. For example, if you make a charitable contribution that qualifies for a federal tax deduction, but you receive something of value for the donation, you generally must reduce the amount you deduct by the value of the benefit you received. Effective August 12, 2019, the federal tax regulations change to ensure this principle applies to taxpayers who make charitable contributions in return for a state or local tax credit or deduction.
If you receive a tax credit
Under the regulations, if you make a charitable contribution of cash or property after August 27, 2018, to an organization eligible to receive tax-deductible contributions, and you receive a state or local tax credit in return for such payment, the tax credit constitutes a return benefit to you. You generally must reduce the amount you claim as an itemized federal deduction for the charitable contribution (Form 1040) by the amount of credit you received.
Anna donated $1,000 to a qualified charitable organization. Pursuant to a state tax credit program in Anna’s state, she will receive a 70% ($700) state tax credit. If Anna itemizes deductions on her federal tax return, she must reduce her $1,000 charitable contribution deduction for the $700 state tax credit, leaving a federal charitable contribution deduction of $300.
The regulations provide an exception. If the state or local tax credit you receive is no more than 15% of the amount (or the fair market value of the property) you contributed, you do not have to reduce your federal charitable contribution deduction.
Betsy transferred a painting to a qualified charitable organization. At the time of the transfer, the painting had a fair market value of $100,000. In exchange for the painting, Betsy receives a state tax credit equal to 10% of the fair market value of the painting. Betsy is not required to reduce her federal charitable contribution deduction for this donation because the amount of the tax credit received does not exceed 15% of the fair market value of the property transferred.
If you receive a tax deduction
Under the regulations, state or local tax deductions received in exchange for a charitable contribution do not constitute a return benefit. Therefore, you generally are not required to reduce a federal charitable contribution deduction on account of receiving state or local tax deductions.
Chris donated $1,000 to a qualified charitable organization. Pursuant to a tax program in Chris’s state, Chris will receive a dollar-for-dollar state tax deduction of $1,000. If Chris itemizes deductions on his federal tax return, he may claim the full $1,000 charitable contribution deduction.
If the state or local tax deduction you received is more than the amount (or fair market value) you contributed, you must reduce the amount you claim as an itemized federal deduction for charitable contributions by the excess amount you received.
Safe harbor – SALT deduction
The IRS released a separate notice that creates a safe harbor allowing taxpayers to treat the amount of their charitable contribution that cannot be claimed as a federal deduction as a state or local tax payment on their federal tax return. Individuals may deduct up to $10,000 of state and local taxes paid ($5,000 if married filing separately). If you’re eligible for this exception, you may be able to amend your 2018 tax return to claim a greater state and local tax (SALT) deduction.
For more information
The tax laws have undergone significant change since the Tax Cuts and Jobs Act of 2017. Be sure to seek competent tax advice before developing any tax strategies based on recent changes.
You can find more information about these tax regulations in this IRS press release: https://home.treasury.gov/news/press-releases/sm705
You can find more information about the tax law changes made by the Tax Cuts and Jobs Act in IRS Publication 5307, Tax Reform Basics for Individuals and Families: https://www.irs.gov/pub/irs-pdf/p5307.pdf.