California State, Local Tax Deduction Cap Workaround Bill Advances

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Laura Mahoney

One of three California bills to allow taxpayers to make charitable contributions to get around the new $10,000 federal cap on state and local tax deductions advanced through its first Assembly committee.

S.B. 227 by Sen. Kevin de Leon (D) would allow taxpayers to contribute to county-level education offices, which would issue certifications to taxpayers and notify the California Franchise Tax Board of the donations. The taxpayers would receive an 85 percent state tax credit for their contributions. The county offices would then distribute funds to the intended recipients.

The bill passed the Assembly Revenue and Taxation Committee 6-3 June 25 with little debate and will be considered next in the Assembly Education Committee.

College Tax Credit

De Leon noted to the committee that he also recently amended S.B. 539 to expand an existing College Access Tax Credit through which taxpayers would contribute to the California Educational Facilities Authority and receive a 75 percent state tax credit rather than the current 50 percent. The bill is awaiting a hearing in the Assembly Revenue and Taxation Committee.

Under a third bill, A.B. 2217 by Assemblywoman Autumn Burke (D), California nonprofit organizations, school districts, community colleges, and colleges and universities that serve students who receive state grants could buy Golden State Credits from the California treasury for 90 cents.

They would sell the credits for $1 to any interested buyers. Those who buy the credits would get a state tax credit equal to 80 percent of their purchase amount, and the purchases would be considered a charitable donation for federal tax purposes.

Burke’s bill is awaiting a hearing in the Senate Governance and Finance Committee.

Menu of Options

The three bills together will “offer a menu of options to taxpayers,” De Leon said.

They must pass both houses by Aug. 31 to reach the desk of Gov. Jerry Brown (D).

The bills are among a number of controversial approaches California and other high-tax states controlled by Democrats are trying to get around the SALT deduction limit. New York, New Jersey, and Connecticut have already enacted laws.

It is unclear whether the IRS will allow the state programs. The U.S. Treasury Department and the IRS said in a May 23 notice that the agency will issue proposed regulations on the issue. Notice 2018-54 also informs taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

More information about the bills is at http://src.bna.com/zTK.

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