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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:
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