New Jersey Enacts Federal Tax Workaround for Property Taxes (1)

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By Leslie A. Pappas

New Jersey has become the latest state to attempt to use charitable contributions as a workaround to new federal limits on deductions of state and local property taxes.

Gov. Phil Murphy (D) signed legislation May 4.

“What the Trump Administration enacted with the SALT cap was nothing more than a tax hike on our working and middle-class families and seniors,” the first-term governor said during a ceremony. “With this legislation, New Jersey authorizes municipalities to allow their taxpayers to make charitable contributions toward important governmental goals in exchange for up to a dollar-per-dollar reduction in their taxes.”

The government plans to create a “playbook” that explains how municipalities may proceed if they want to create a charity to offer the tax credits, Murphy said. The Department of Community Affairs Division of Local Government Services will be available to help municipalities that want to establish charitable funds for their communities, the governor’s office said.

Similar Measures

Murphy in February called upon the Legislature to send a bill to his desk as fast as possible that would allow New Jersey residents to convert property tax payments into charitable contributions. Thirty-three states already have systems in place to allow taxpayers to make charitable contributions in exchange for up to a dollar-per-dollar reduction in taxes, Murphy said at the time.

Passed by the state’s Legislature April 12, S.1893 permits municipalities to establish charitable funds and allow donors to receive property tax credits in exchange for donations. New York was the first to enact such a law as a workaround to the federal tax act’s new cap on the state and local tax (SALT) deduction. Taxpayers could get a credit on their property tax bill of up to 90 percent of the value of the donation.

Lawmakers in several states are considering similar measures, including in California and Illinois.

New Jersey Policy Perspective, a progressive think tank and policy group, said the workaround is likely to benefit New Jersey’s wealthiest families the most, with the top 1 percent receiving 54 percent of the benefits from the SALT workaround.

“The bottom 80 percent of families (those with annual incomes under $142,000) would receive less than 1 percent of the benefit,” said the group in a statement, calling on New Jersey lawmakers to “pursue bold tax reform” that would give more taxpayers relief.

IRS Trouble?

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.

“If the IRS would have to reconsider or review our situation, they would have to review the other 33 states that are out there,” Murphy said during a ceremony before the signing, standing in front of a bright green banner that read, “Protecting New Jersey Taxpayers.”

U.S. Rep. Josh Gottheimer (D-N.J.) said May 4 that he had requested a second meeting with the IRS to talk about how the federal tax laws are impacting New Jersey.

The state’s Attorney General is prepared to defend the legislation, one of the bill’s sponsors, Assemblyman John McKeon (D), said during floor debates on the bill.

The law is the second New Jersey has enacted in the past two weeks to ease tax burdens under the 2017 federal tax act ( Pub. L. No. 115-97). The new federal law caps the SALT deduction at $10,000 and lowers the amount of mortgage interest that can be deducted. Those changes are a blow to New Jersey residents, who pay the highest property taxes in the country.

On April 20, Murphy signed legislation that will permit taxpayers to make dedicated prepayments towards anticipated property taxes regardless of whether municipalities had issued tax bills.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at lpappas@bloomberglaw.com

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

For More Information

Text of S. 1893 is at http://src.bna.com/xRN.

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