Illinois’ Federal Deduction Workaround Measure Hits Snag

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By Michael J. Bologna

Illinois legislation circumventing the new $10,000 deduction cap on state and local taxes hit a snag May 2, when senators expressed concerns that school districts would be unable to collect tax dollars designated as “charitable contributions.”

Senate chief sponsor Julie Morrison (D) said the SALT workaround bill ( H.B. 4237) contains flaws that have caught the attention of school districts and teachers’ unions. Speaking during a Senate Revenue Committee hearing, Morrison conceded the bill lacks specific language requiring counties collecting taxpayer funds designated as charitable contributions to fairly distribute the funds to school districts and other units of government.

Morrison initially called on the Revenue Committee to support the bill, noting that the House passed the measure on April 18, and an amendment would be time-consuming. The committee, postponed action, however, stressing the importance of a remedy to the local funding problem. Committee members also rejected her offer to draft a “trailer bill” to address school districts’ concerns.

“Let me make this bill better and bring it back to you,” Morrison said as the hearing concluded.

Illinois Excellence Fund

H.B. 4237 directs the state to create an income tax credit for dollars contributed to the new Illinois Education Excellence Fund during a taxable year. Funds contributed in this fashion, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts, would be used by the state for public purposes.

Similarly, a property tax credit would be created for dollars contributed to a county treasury in lieu of property taxes.

Morrison said the proposed law would permit Illinois taxpayers to get around the new $10,000 cap on the federal deduction for state and local taxes created by the 2017 federal tax act ( Pub. L. No. 115-97).

“In Illinois, the average SALT deduction in 2015 was $12,500. Eighty-five percent of the people in Illinois who utilize this deduction earn less than $200,000,” she told the committee. “This bill simply creates a dollar for dollar income tax credit for individuals who donate to the state treasury and a dollar for dollar property tax credit for individuals who donate to a county treasury.”

Lawmakers in several states are considering similar measures, including in California and New Jersey. New York recently became the first state to enact legislation minimizing the impact of the federal deduction limit.

However, U.S. Treasury Secretary Steven Mnuchin has cast doubt on such workarounds and has threatened to audit taxpayers who use them. IRS Publication 526 says that taxpayers can’t deduct as a charitable contribution any payment for which they receive a benefit in return.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

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

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