The IRS has issued final regulations requiring taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return for the contribution. In Notice 2019-12, the IRS provides a safe harbor permitting taxpayers who claim itemized deductions and have less than $10,000 in total state and local tax deductions to treat the portion of a payment that they make in exchange for the credits for which charitable contributions are or will be disallowed as a state or local tax payment. For example, if a state grants a 70 percent state tax credit pursuant to a state tax credit program, and an itemizing taxpayer contributes $1,000 to that program, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 federal charitable contribution deduction by the $700 state tax credit, leaving a federal charitable contribution deduction of $300. In addition, if the taxpayer qualifies for the safe harbor, he or she may deduct the $700 state tax credit as a payment for state and local taxes.
However, charitable contribution deductions will not need to be reduced if the state program allows dollar-for-dollar state and local tax deductions instead of credits. For example, a taxpayer who receives a state tax deduction of $1,000 for a contribution of $1,000 is not required to reduce the federal charitable contribution deduction.
The regulations also provide a de minimis exception for tax credits of no more than 15 percent of the amount transferred. For example, a taxpayer who makes a $1,000 contribution is not required to reduce the $1,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $150.
These regulations are effective Aug. 12, 2019 and are applied to contributions made after Aug. 27, 2018. These rules also apply to payments made by estates and trusts in calculating their charitable contribution deductions.
For more information about how the final regulations may affect you, please reach out to us at firstname.lastname@example.org or 800.899.3633.