The IRS has warned taxpayers against state sponsored funds some states have designed to circumvent the new $10,000 limitation on deductions for state and local taxes (Notice 2018-54).
States have been proposing to allow taxpayers to contribute to and take a charitable contribution deduction for transfers to a state sponsored fund, which would then provide credits against state and/or local income taxes.
Predictably, the Internal Revenue Service has proclaimed that substance, not form, will control and federal, not state or local, law will govern federal income tax. The IRS will soon issue proposed regulations to “assist taxpayers in understanding the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction for state and local tax payments.”
The short interpretation is the $10,000 limitation on state and local taxes will be strictly enforced. Incidentally, the Pennsylvania Educational Improvement Tax Credit program, which had allowed certain charitable contributions to earn up to a 90% credit against Pennsylvania’s personal income tax, is expected to be upended by these same proposed regulations.
Please feel free to contact one of our tax professionals if you have any questions.
This post was written by LeRoy Metz.