Yesterday, the IRS released proposed regulations which thwart efforts made by the State to lessen the impact felt from the recent changes to the Federal tax code, which placed a $10,000 cap on state and local tax (SALT) deductions.
In May, Governor Murphy signed into law a bill which allowed municipalities, counties, and school district to establish charitable funds, and authorized property taxpayers who donated to these funds to receive a credit towards their property taxes for their charitable contributions. By creating these charitable funds and allowing for credits against property taxes, a taxpayer would be able to avoid the $10,000 cap on SALT deductions and instead fully deduct the amount of their property taxes as a charitable contribution.
From the onset, the IRS signaled that they would not allow the workarounds that New Jersey and several other states enacted in response SALT cap. However, prior to enactment of a SALT cap, the IRS had allowed similar charitable contributions and credit structures to operate in other states. The proposed regulation would be effective against newly created workaround as well as structures existing prior to the federal tax changes.
The proposed regulations would eliminate the effectiveness of any workaround by reducing the deductions available for charitable contributions by the amount of any state or local tax credit the taxpayer receives or expects to receive in return. This eliminates any federal tax benefit a taxpayer would derive from making a charitable contribution to a municipal fund rather than simply paying their property tax bill.
As with any proposed regulation, there is a comment period open for 45 days. The League as well as our national affiliate, the National League of Cities, will be submitting comments on the proposal. The League will provide our members with any developments regarding these proposed regulations and will provide further insight upon further review of the proposals.
In response, both Governor Murphy and State Attorney General Gurbir Grewal expressed opposition to the proposal and that the State will challenge the proposal in Court if necessary.
Contact: Frank Marshall, Esq., League Staff Attorney, FMarshall@njslom.org, 609-695-3481, x137.