TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, May 24, 2018

IRS Warns Taxpayers That Regs Will Prevent States From Circumventing $10k S&L Tax Cap With 'Charitable' Contributions

Bloomberg:  IRS Warns Taxpayers About Tactics to Avoid Property Deduction Caps, by Lynnley Browning:

The Internal Revenue Service warned taxpayers to proceed with caution after states including New York and New Jersey approved workarounds involving charitable organizations to circumvent new federal limits on deductions for state and local taxes.

“Taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the agency said in a press release Wednesday [IR-2018-122], the first time it’s weighed in on the matter. The Treasury Department and IRS intend to propose regulations addressing measures that would allow homeowners to declare property taxes as charitable deductions, which are still unlimited, according to the IRS [Notice 2018-54, 2018-24 IRB ___ (June 11, 2018)].

The tax overhaul created a cap of $10,000 for state and local tax deductions, a pittance for states that have high property taxes such as New Jersey, New York and Connecticut. New Jersey Governor Phil Murphy signed legislation allowing local governments to set up charitable organizations that can accept property tax payments. In turn, homeowners can declare those “donations” as gifts to offset federal taxable income. New York Governor Andrew Cuomo signed similar legislation last month.

“I think it’s absolutely appropriate for Treasury to signal that these are tax evasion schemes, and it’s good for them to signal that early on,” House Ways and Means Chairman Kevin Brady of Texas said Wednesday.

Earlier this year, Treasury Secretary Steven Mnuchin called the proposals “ridiculous.” ...

http://taxprof.typepad.com/taxprof_blog/2018/05/irs-warns-taxpayers-that-regs-will-prevent-states-from-circumventing-10k-sl-tax-cap-with-charitable-.html

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Comments

I'm quaking in my boots. As a matter of terminology, I really dislike people saying "evasion" when what they mean is "avoidance" (and even that is arguable, maybe it is just sensible tax planning).

Posted by: Victor Thuronyi | May 24, 2018 9:42:33 AM

When this sorts out, Trump will have given the IRS its first large budget increase in ages: so it can audit all those returns with fake charitable deductions.

Posted by: AMTbuff | May 24, 2018 9:44:50 AM

The NJ law lets a municipality create what seems to be a municipal charity to pay for certain types of things, and allows the municipality to offer a dollar for dollar credit against real property taxes for donations to that charity.

Question: If another charitable organization pays for similar items (maybe for that town, maybe for others) is there an argument to be made that the donor is still entitled to the credit against his real estate tax for contributions to the other charity? Equal protection maybe?

Posted by: Carey Gage | May 24, 2018 9:50:07 AM

I thought blue states wanted the rich to pay their fair share. If you have $20k in property taxes, you'll pay taxes on $10k of that. If you are in the highest 35% bracket, that's $3,500. Given the cut in the top income tax rate, this should still be close to a wash. Pffht.

Posted by: Meremortal | May 24, 2018 9:57:12 AM

Typical prog: "We should all pay our fair share!!! Jeeves, get my accountant on the tele, I've got to move my money off shore."

Posted by: Jeff H | May 24, 2018 10:18:54 AM

IRS is full of crap. It works for the likes of Rahm Emanuel to put his kids thru private school. But it wont be allowed for you PEONS.

Posted by: sdharms | May 24, 2018 10:57:52 AM

Blue state taxpayers have enjoyed decades of federal subsidies on their bloated state and local taxes, which people in low-tax states have had to help to make up. Taxes are blown on buying votes using outrageous government pensions, waste in education, and overpaid workers, in large part because of the cozy political relationships with unions and academics. The tax pain was lessened and ignored by getting a federal deduction, but that game is coming to an end. Oh, this won't encourage blue staters to stop blaming Trump and start electing fiscally responsible officials, but it will make them pay for their own follies and corruption.

Posted by: Woody | May 24, 2018 1:24:59 PM

The blue states are obviously hoping that liberal IRS bureaucrats will simply let them have their way. The problem, of course, is that the value of a charitable contribution is reduced by the value of any quid pro quo (with certain minor exceptions). So if you make a $10,000 contribution to a charity, but receive a $10,000 state property tax credit, your charitable gift is valued at $0.

Posted by: Ty Beard | May 24, 2018 3:19:00 PM

The IRS should be ashamed to issue such a nothing-burger. Nothing substantive, they can't even say that deductions will be denied, likely because they don't have authority to do so. Requires legislative fix or precedential judicial decision.

Posted by: Tuphat | May 24, 2018 8:08:22 PM