States Vow to Fight IRS Efforts to Nix State-Funded Charities as SALT Cap Fix

By:
Chris Gaetano
Published Date:
May 29, 2018
IRS


The state governments of New York and New Jersey are responding negatively to a recent notice from the IRS strongly suggesting that the agency will not accept as valid charitable contributions made to state-run nonprofits as a way to mitigate the impact of the Tax Cuts and Jobs Act's state and local tax (SALT) deduction cap.

The IRS notice, issued last week, said the agency plans to release guidance soon in response to efforts by several state governments to mitigate the impact of the $10,000 limit on SALT deductions. While particular policies are not mentioned in the notice, it heavily implied that the IRS will not look kindly upon, specifically, people donating to a state-run nonprofit to claim a charitable deduction on federal taxes. 

"Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes," said the IRS notice. 

In response to the state efforts, the IRS said it plans to propose regulations that "will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers."

New York Governor Andrew Cuomo condemned the move, saying that it amounts to using the IRS as a political weapon. The recent passage of the state budget created two new state-operated charitable contribution funds that accept donations for improving health care and education in New York. The new budget also authorizes local government bodies such as school districts to create similar charitable funds, donations to which would yield a local property tax credit. The intention is for taxpayers to be able to itemize these contributions as deductions on their state and federal tax returns, the very situation the IRS issued the notice to address. 

"Make no mistake: We have been and will continue to fight against this economic missile with every fiber of our being. The IRS should not be used as a political weapon, and I urge this administration to stop its partisan assault on New Yorkers and instead work with us to deliver real, lasting relief for hardworking families," said Cuomo. 

New Jersey Attorney General Gurbir S. Grewal also released a statement, saying that his state would fight any attempts to shut down tax deductions from state-run nonprofits. He said that both policy and precedent supports what he and other states are doing. 

“The statute is explicit that such contributions include gifts given to state governments and their political subdivisions,” Grewal notes. “The only remaining issue is whether such gifts are deductible if the contributor gets a tax credit in return.” While the IRS has previously “answered that question resoundingly in favor of laws” like New Jersey’s, the latest guidance “suggests that the IRS plans to tell states and taxpayers alike the answer is no.”

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