By Stephanie Casey, Tax Senior Manager | Family, Entrepreneur & Executive Advisory Services Team
Under the Tax Cuts and Job Act (Public Law No: 115-97) the deduction on individual income tax returns for state and local taxes has been limited to $10,000 a year ($5,000 for married individuals filing separate returns). One way taxpayers could get around this new rule was to purchase Virginia NAP Credits. The program allows a taxpayer to make a charitable contribution to a qualified Virginia charity and in return receive a state tax credit worth up to 65 percent of the charitable contribution. Since individual taxpayers were getting a federal deduction for the charitable contribution in addition to the state tax credit, the value of the contributions generated a very good return.
Since the $10,000 deduction limitation was put in place with the new tax act, a number of states either already had in place or were considering adding programs to allow similar types of credits. This benefit, however did not last long. On August 23, 2018, U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit. Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.
|For example, if a state grants a 65 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $650 state tax credit. The taxpayer must reduce the $1,000 contribution by the $650 state tax credit, leaving an allowable contribution deduction of $350 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.|
The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150 (15 percent).
The reduction in the allowed federal deduction greatly diminishes the value of the contribution. Luckily, any contributions made and NAP credits received before August 27, 2018, can still deduct the full value of the charitable contributions.
Significant benefits can still be received through these programs, however, we recommend you assess your charitable giving and determine whether these programs are beneficial to you given your particular tax situation.
Additional Individual Tax Planning Resources:
- Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items
- Charitable Contributions: Potential Impact on Section 199A
- New Short Term Tax Credit Available for Family and Medical Leave Benefits
- 2018/2019 Tax Planning Guide
Article Source: IRS.gov