Illinois House Passes Charity Workaround of Federal Deduction Cap

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 Che Odom

The Illinois House voted April 18 to create an income tax credit equal to taxpayer contributions to a new state “Excellence Fund” to pay for public projects.

The bill ( H.B. 4237) is a response to the 2017 federal tax act’s ( Pub. L. No. 115-97) limit on the deduction for taxes paid to state and local governments. The bill would permit taxpayers to contribute state and local taxes owed above the $10,000 cap to a state charity to receive the credit.

The House, which passed the measure by a 93-15 vote, next sends the bill to the Senate for consideration.

New York First to Enact

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

On April 12, New York Gov. Andrew Cuomo signed an omnibus budget bill ( S. 7509) that created a payroll tax and charitable funds to offset the deduction limit.

In New Jersey, the Legislature passed a bill ( S.1893) April 12 that would permit municipalities, counties, or school districts to establish charitable funds and allow donors to receive property tax credits in exchange for donations. Gov. Phil Murphy (D) hasn’t signed the bill, but has voiced support for the proposal.

In California, the Assembly hasn’t yet voted on a bill ( S.B. 227) that passed the state Senate Jan. 30. The measure would allow a personal income tax credit equal to 85 percent of an amount contributed by a taxpayer for the taxable year to the California Excellence Fund.

‘Exclusively Public’

The Illinois legislation would require that dollars contributed to the Illinois Excellence Fund must be used for “exclusively public” purposes, as specified under Section 170 of the Internal Revenue Code pertaining to charitable contributions and gifts.

The measure also would allow county boards to establish funds for the purpose of accepting contributions for “exclusively public purposes.”

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: Che Odom in Washington at codom@bloombergtax.com

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

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