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Tax Blog

SALT Deduction Caps have been Finalized, with some Exceptions

The IRS has issued final rules in regards to charitable contribution deductions under Sec. 170(c). The Tax Cuts and Jobs Act, while virtually reducing taxes owed across the board for all Americans, did establish a $10,000 cap on SALT (State and Local Tax) deductions, the impact of which is primarily felt by those living in states with higher tax rates or who own more expensive property than the average American.

Some states responded with this by enacting their own programs that permit residents to make contributions to charity or state/local government organizations in exchange for state and local tax credits. Such programs are designed to allow taxpayers to circumvent the $10,000 SALT deduction from charitable contributions. The final regulations on charitable contributions address this loophole by requiring that any tax credit issued in response to a charitable contribution in a quid pro quo arrangement must not be eligible for a deduction under Sec.170.

However, the IRS has decided to allow for an exception to any charitable contribution deduction if a state program uses dollar-for-dollar state or local tax deductions instead of credits. This is because while the IRS does acknowledge that this sort of arrangement could easily be conducted on a quid pro quo basis, the risk of these deductions being used to circumvent the $10,000 limitation is low because dollar-for-dollar deductions are limited to the taxpayer’s state and local marginal rate.

To complement the implementation of these more stringent regulations, the IRS has also proposed a safe harbor that allows certain taxpayers who itemize their deductions to treat charitable deductions as state tax payments. In order to qualify for this safe harbor, taxpayers must itemize their deductions for federal tax purposes and have a total state and local tax liability of under $10,000. This is intended to mitigate the situation in which donors to a state tax credit program would be prevented from taking a charitable contribution deduction for payments to entities that fall under Sec. 170(c.) to the extent that they receive a state or local tax credit. While the IRS intends to cut away at this proposed safe harbor in the future, for now it is intended to smooth out this transition for the time being.

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