By now, you probably know all about the so-called SALT (state and local tax) deduction limitations imposed by the Tax Cuts and Jobs Act. If your property, local and state taxes exceed $10,000 (couples) or $5,000 (singles), well, too bad. That’s all you can deduct on your federal tax returns.
Some of the highest-tax states had plans to fight back, in some cases by allowing people to make deductible charitable deductions to their school districts in lieu of property taxes, receiving a credit for those taxes at the state level. The IRS vowed to fight these measures, and now it has come out with new regulations that fulfill that promise.
The IRS issued rulings that the credits against state taxes amounted to a quid pro quo received for the charitable contribution, which negates the deductibility of the charitable contribution. This is actually not a new position for the IRS to take. Generally, under existing rules, the value of anything you receive in return for a charitable contribution has to be subtracted from the contribution when claiming deductions. The IRS simply made it clear that this also applied to state tax credits.
Nice try, but the states are going to have to come up with something more creative.
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