State and Local Tax Credits for Charitable Donations

One change in the Tax Cuts and Jobs Act is the limitation of state and local tax (SALT) deductions to $10,000. For individuals in certain localities, there’s a chance that some of the SALT they pay will not be deductible. Certain high-tax states reacted with legislation that would have effectively made state taxes a charitable donation. For instance, a taxpayer could make a donation to the state and receive a tax credit in exchange.

The IRS responded by issuing proposed regulations on Aug. 23, 2018, which effectively nullified any such action taken by the states. These proposed regulations would require that the charitable deduction be reduced by any state tax credit granted as a result of a donation. For example, if a state granted a 90 percent tax credit on contributions to the state, then only 10 percent of the donation would be deductible; a 100 percent credit would negate any charitable deduction.

There is an exception to this proposed rule. If the tax credit is 15 percent or less of the donation, the taxpayer would not be required to reduce their deduction. However, a 15 percent credit would probably not be enough incentive for the majority of taxpayers to make a state donation.

While the discussion above specifically addresses a donation to the state, the proposed regulations were broadly written to include a donation to any entity where a state tax credit is expected in excess of 15 percent of the donation.