The U.S. Treasury Department and IRS this afternoon released for publication in the Federal Register final regulations (T.D. 9864) regarding the availability of charitable contribution deductions under section 170 when a taxpayer receives or expects to receive a corresponding state or local tax credit.
Read the final regulations [PDF 434 KB] (19 pages) as published in the Federal Register
Under the 2017 U.S. tax law (Pub. L. No. 115-97 also referred to as the “Tax Cuts and Jobs Act”), in the case of an individual taxpayer, itemized deductions for state and local income taxes, state and local property taxes, and sales taxes are limited to $10,000 in the aggregate (not indexed for inflation). This cap does not apply to personal or real property taxes incurred in carrying on a trade or business or otherwise incurred for the production of income.
In response, some states acted or proposed to provide relief to their residents affected by the repeal of the uncapped state and local tax (SALT) deduction. Treasury and the IRS in August 2018 issued proposed regulations as guidance concerning the SALT deduction cap provisions under the 2017 tax law and their interaction with claims for charitable contribution deductions. Read TaxNewsFlash
The preamble to today’s release states that the “final regulations generally retain the proposed amendments set forth in the proposed regulations, with certain clarifying and technical changes.”
Related IRS release
According to a related IRS release—IR-2019-109—the final regulations apply to contributions made after August 27, 2018, and are effective on August 12, 2019, and largely adopt the rules in the proposed regulations.
The IRS also released an advance version of Notice 2019-12 [PDF 54 KB] providing a safe harbor that allows an individual who itemizes deductions to treat, in certain circumstances, payments that are or will be disallowed as charitable contribution deductions under the final regulations as state or local taxes for federal income tax purposes. Eligible taxpayers can use the safe harbor to determine their SALT deduction on their 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return, Form 1040X, if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).
The release concludes that the Treasury Department and IRS will continue to consider issuing future guidance on a number of issues raised by commenters.
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