June 30, 2019

No Work-Around to SALT Cap, Says IRS

Earlier this month, the IRS issued final regulations pertaining to Section 170. At stake was whether a taxpayer could subvert the $10K SALT deduction cap (not popular in California) by making a charitable contribution to a state or local charitable fund in exchange for a state or local income tax credit. The idea, essentially, being that you move your payment of state income taxes to a different part of Schedule A where you would avoid the aforementioned $10K limitation.

Predictably, the IRS did NOT love this scheme. They adopted the quid pro quo approach in their analysis, which basically means that they look to what the taxpayer is receiving for their "donation" to determine how much they can deduct. Essentially what they said is that because the taxpayer is receiving a real and immediate benefit for their donation, they would need to reduce the charitable donation by the amount of the state or local tax credit received. In other words, it means that the taxpayer would only get to write off a sliver of the donation if it didn't provide a dollar-for-dollar credit. Or, if they got a dollar-for-dollar credit, they'd get no charitable deduction. In either case, it nullifies any potential net tax benefit a taxpayer might hope to receive.

So, don't expect California, or whichever state you reside in, to move forward with a program to exchange charitable donations for state/local tax credits, because it just doesn't pencil out. Fortunately, there are many other tax saving strategies out there that more than mitigate the pain of the SALT Cap. Get in touch with us to see which strategies would make sense in your particular circumstance.

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