The IRS has officially blocked one of the ways that high-tax, Democratic states are letting residents circumvent limits on tax deductions, Governing reports.
The 2017 federal tax overhaul imposed a $10,000 cap on state and local tax (SALT) deductions, which can increase what some owe in federal taxes. In response, some states changed their rules to let people “pay” some of their state and local taxes into a state or local charitable trust because federal tax reform did not cap the deductibility of charitable contributions.
This week, the IRS closed the charitable deduction loophole—and did so in a way that charities say will have a far-reaching impact.
“Wherever you are in the country or on the political spectrum, there is something to upset everyone in the IRS rule,” says the National Council of Nonprofits’ David L. Thompson.
Furthermore, it might be the first of several moves the federal government makes to end federal tax workarounds.
The IRS essentially expanded the quid pro quo doctrine to tax credits. For example, if someone donates to a charity and receives a tote bag in return, she is supposed to subtract the value of that bag from her charitable contribution when claiming it on tax forms. For residents receiving a tax credit when donating to a charitable trust, they have to now deduct the value of that credit from their contribution. It effectively blocks residents from claiming their entire payment to a state or local trust as tax-deductible. Read the full story.