Here’s How the New SALT Cap Regulations Work

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By Robert Lee

The Internal Revenue Service has unveiled new regulations to stifle attempts by states to circumvent the 2017 tax act’s $10,000 limit on state and local tax deductions.

Here’s how the IRS’s proposed rules work, according to senior Treasury Department officials:

1. A federal charitable deduction would only be allowed to the extent a contribution to a charity exceeds the amount of state tax credit generated by the contribution.

For example, if a taxpayer makes a $1,000 contribution to a charity, and receives a 70 percent ($700) state tax credit, the taxpayer would only be able to claim a $300 federal charitable contribution tax deduction on their federal return.

2. However, if the state tax credit a taxpayer receives by making a charitable contribution is 15 percent or less, the taxpayer can deduct the full amount of their contribution from their federal taxes.

Thus if a taxpayer contributes $1,000 to charity, but only receives a state tax credit of 15 percent ($150) or less, the taxpayer can claim a $1,000 federal charitable contribution deduction on their federal return.

3. The new regulations are focused on state tax credits, not deductions. Charitable contributions for which taxpayers receive a state tax deduction are unaffected by these regulations.

If a taxpayer contributes $1,000 to charity, and receives a $1,000 state charitable contribution deduction, the taxpayer can still claim a full $1,000 federal charitable contribution deduction.

The Treasury officials provided reporters with more details about the agency’s thinking behind the rules and their projected impact:

  • The rules are based on application of the longstanding “quid pro quo” legal doctrine to state and local tax, or SALT, credits, the officials said. Citing tax code Section 170, the basic idea of “quid pro quo” is this: When a taxpayer makes a charitable contribution and receives a valuable benefit in return, the taxpayer can only deduct the net value of that contribution. The new regulations simply apply that “quid pro quo” principle with respect to state tax credit programs, the officials said.
  • The rules would apply to pre-existing and new programs enacted since passage of the 2017 tax law.
  • Treasury and the IRS project only 5 percent of taxpayers would be affected by the proposed regulations. Ninety percent of taxpayers won’t itemize deductions next year and would be unaffected by the new rules, the officials said. Another 5 percent would itemize, but would be above the $10,000 cap. Only 1 percent of taxpayers would see an effect on tax benefits for donations to school choice tax credit programs.

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