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Proposed IRS Rules on State Giving Tax Credits

Oct 10, 2018

The IRS is accepting comments through October 11 on proposed regulations that reduce the charitable deduction for individual taxpayers who itemize their federal tax deductions and benefit from state or local tax credits for giving.

Read on for more information about the regulations, how to submit comments, and sample language you can use to make a comment.

Read the regulations     Submit a comment     Read our comment

Background

If the IRS adopts the regulation as written, this appears to affect Colorado donors claiming tax credits like the Child Care Contribution Credit, the credit for Contributions to Enterprise Zone Projects, and others. The regulation does not affect state or local tax deductions. Tax credits of 15 percent or less of the value of the donation are also excepted. If adopted as written, they would apply to contributions made after August 27, 2018.

The proposed regulations are intended to address new laws in several other states to work around the new $10,000 limit on the federal itemized deduction for state and local taxes (SALT). Those laws would essentially allow taxpayers to make certain state and local tax payments in the form of charitable contributions to nonprofits formed by state and local governments. As a result, those taxpayers would be able to deduct state and local taxes in excess of $10,000 via the charitable deduction.

But the regulations not only affect these government agencies or government-formed charities, they require individuals who make payments, or transfer property to nonprofits, to reduce their federal charitable deduction by the amount of any state or local tax credits they claim for charitable giving. 

The regulations propose treating the value of tax credits like other benefits donors may receive when making a gift - e,g. subtracting the value of the cost of a meal at a charity gala from the tax-deductible contribution.

It's estimated that between 5 and 15 percent of taxpayers will continue to itemize due to the standard deduction increase in the Tax Cuts and Jobs Act. It appears that non-itemizing taxpayers who claim the standard deduction and state or local tax credits are unlikely to be affected by this change.

Visit Leaffer Law Group, for a helpful article explaining the rationale for the proposed change.

On September 5, the IRS clarified that business taxpayers that receive state or local tax credits can still typically deduct such payments as business expenses. 

How to comment on the regulation

The IRS is accepting comments on the regulations through October 11, 2018. You can read the regulation and submit a comment via regulations.gov. Visit our Tips and Tricks webpage for suggestions on writing effective regulatory comments

Comment on the regulations     Tips and Tricks: Regulatory Comments

Note: Both quantity and quality are considered when regulatory comments are reviewed. Quantity of comments can indicate widely held view on particular issue. However, if many comments use similar or identical language, reviewers will know that there has been an organized effort to deliver specific messages. 

Please use the following sample comments as a starting point for developing your own quality comments. For the places with brackets, you can explain how your organization will be affected by this change and any relevant stories, statistics, experiences and perspectives. Whether you customize this message a lot or a little, thank you for taking the time to comment and make sure your voice is heard. 

Sample language for your comment

Re: Contributions in Exchange for State or Local Tax Credits (REG-112176-18)

I am writing on behalf of [name of organization] to express concerns about the proposed rule on Contributions in Exchange for State or Local Tax Credits [REG-112176-18]. Many donors to [name of organization] give not only because they support our mission, but they also benefit from [name of CO tax credit] for their gifts. This credit encourages them to give more than they would without the credit.

[Describe how the credit supports the work of your organization especially in terms of fundraising and program goals. Include any relevant anecdotes and statistics].

Colorado established [name of tax credit] to support the ability of nonprofits to meet the needs of communities throughout our state. By requiring taxpayers to reduce their charitable deduction by the amount of any state or local tax credits they receive, these taxpayers will likely give less and could stop giving altogether. Even through far fewer taxpayers are expected to itemize due to tax reform, many of our most generous donors are likely to continue itemizing and would be negatively impacted by this rule. Any reductions in giving reduce the capacity of [name or organization] to serve our constituents.

[Provide any details you have on how reduced giving reduces your organizational capacity]

This rule also undermines the effectiveness of tax incentives for charitable giving offered by the state of Colorado and its local governments. State and local elected representatives enacted these incentives not to get around changes in tax rules but to ensure our communities are well served through meaningful partnerships between governments and nonprofits.   The proposed rule disrupts long-standing state tax policy that is unconnected to recent changes in the federal tax code and unfairly penalizes both taxpayers and charitable organizations.

I urge you not to move forward with these draft regulations. The IRS should go back to the drawing board and develop regulations targeting the laws that turn tax payments into donations rather than those that help nonprofits like [my organization] build stronger communities.   

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