IRS Final Regulations on Charitable and State and Local Tax Credits

On June 11, 2019 the U.S. Department of the Treasury and The Internal Revenue Service published final regulation regarding taxpayer charitable contributions and sate and local tax credits. The final regulation will require taxpayers making payments to an entity eligible to receive tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return. When determining the amount of charitable contribution deduction, these regulations will also apply to payments made by a decedent’s estate or payments made by a trust.

To provide an example: let’s say a state grants a 60% state tax credit pursuant to a state tax credit program, and an itemizing taxpayer contributes $10,000 pursuant to that program, the taxpayer receives a $6,000 state tax credit. A taxpayer who itemizes deductions must reduce the $10,000 federal charitable contribution deduction by the $6,000 state tax credit, leaving a federal charitable contribution deduction of $4,000.

The final regulations offer an exception for dollar-for-dollar state tax deductions and state tax credits no higher than 15% of the transferred amount. For example, a state tax deduction of $2,000 for a contribution of $2,000 will not be required to reduce the $2,000 federal charitable contribution deduction; conversely, a taxpayer who makes a $2,000 contribution is not required to reduce the $2,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $300.

These regulations will apply to contributions made after August 27, 2018 and will be effective on August 12, 2019.