If you have been reading my posts regularly, you know that State and Local Tax (SALT) deductions have been capped at $10,000. This severely hurt people in high tax “blue” states such as California, New York, Maryland, Mass, New Jersey, and many other places.
A few states have already passed laws to try to blunt the impact of the $10,000. The aim was to convert nondeductible taxes into deductible charitable gifts.
For example, in New York, residents will be given the option to contribute to a state operated charitable fund in exchange for a credit equal to 85% of their gift that can be used against their N.Y. state individual income tax liability. The statute also authorizes local governments to create a similar charitable fund that will provide a property tax credit of up to 95% of the donation.
IRS’s answer: IRS will be issuing regulations that will attempt to clamp down on these gimmicks, which the Treasury Secretary calls “ridiculous.” I believe that IRS will treat this “charitable contributions” as tax payments and NOT as charitable contributions. However, IRS has to be careful here since they have approved credits available to state scholarship and qualified tuition programs where residents can donate to state scholarship and qualified tuition programs and get credits to offset their taxes. IRS has previously blessed such a law.
My take is that you can expect the issue to end up in court. This will be a very contentious area.
NOTE: If you own investment property, you can deduct all property taxes on that property without any limitation. Likewise,if you have a small business and claim a home office deduction, you can deduct part of the property taxes as part of your home office in addition to the $10,000 cap on state and local taxes.
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