Final Regulations on Charitable Contributions When a State or Local Tax Credit is Received

The Treasury Department and the Internal Revenue Service have issued the final regulations regarding charitable contributions for donors also receiving a state/local tax credit.  These final regulations, issued June 11, 2019, largely adopt the proposed regulations published August 27, 2018.  We previously issued an in-depth "Our Thoughts On" piece on this topic; see https://www.schneiderdowns.com/our-thoughts-on/irs/tax/interplay-of-new-charitable-deduction-regulations-state-local-tax-credits.

These regulations received more than 7,700 written comments during the public discussion period, along with 25 in-person remarks made at the November public hearing.  A large majority of comments were in favor of adopting the proposed regulations without change.

Under the final regulations, a taxpayer who makes a contribution to an eligible tax-deductible entity must reduce the amount of charitable deduction they recognize on their personal individual income tax return by the amount of state or local tax credit received.  This is in line with the long-held position that any benefit received from a donation must be netted against the total when calculating charitable deductions.

Under current Pennsylvania law, when a taxpayer makes a contribution to a special purpose entity (SPE) designed to promote education or scholarships, they can receive a credit against their Pennsylvania state income tax worth between 75-90% of the total contribution.  However, according to the changes in the final regulations, the federal itemized charitable deduction must be reduced by the exact amount of that state tax credit.  An example to illustrate:  a taxpayer makes a $10,000 contribution to a SPE, receiving a PA tax credit of $9,000.  Their federal charitable deduction is therefore limited to $1,000.

An additional safe harbor has been detailed within the final regulations that allows an itemizing taxpayer who has not already reached the maximum allowable state and local tax (SALT) deduction of $10,000 per year to include the state/local tax credit within their SALT deduction.  Thus, from the example in the previous paragraph, the $9,000 PA tax credit (disallowed for charitable purposes) could be added to the total SALT deduction, up to the maximum amount of $10,000 per year.

The final regulations further clarify that when the tax credit is no more than 15% of amount paid, a reduction in federal itemized charitable deductions is unnecessary.

If you want to know more about this topic or others with regard to your individual income tax situation, please contact your local Schneider Downs tax team for assistance.