You may have read over the past year and a half that Treasury regulations around the cap on the state and local tax (SALT) deduction would hurt charitable organizations. But we’re here with the good news: that’s not necessarily the case, at least for legitimate charitable gifts. Let’s start with some background.
As you may recall, the 2017 tax bill instituted a $10,000 cap on the state and local tax deduction. In turn, several high-tax states developed “workarounds” for taxpayers to disguise their state and local tax payments as charitable donations in order to circumvent the cap. In response to those workarounds, Treasury took a sledge hammer to the problem and issued rules that effectively shut down the ability to get a charitable deduction when also receiving a state tax credit. However, these rules didn’t just apply to the new SALT workarounds, they also hit all charities that benefited from the state tax credits, such as those providing scholarships for low-income students.
There was a lot of uncertainty around what this would mean for existing charities and potential new charities benefiting from similar incentives. But, Treasury came down on the right side, issuing further guidance for legitimate charitable gifts.
The guidance, which provides safe harbors for individuals, corporations and certain pass-throughs, allows taxpayers to receive a full state tax credit and a federal tax benefit for the amount of the state benefit up to $10,000. And, you can receive a federal charitable deduction for any amount for which you did not receive a state benefit.
So, in short, you can still get a federal tax benefit for your donations to these charities, you just can’t avoid the SALT cap while doing it.
This week, the IRS and Treasury will hold a hearing to discuss the proposed guidance and hear testimony from stakeholders. We expect guidance to become final this year without any major changes.