United States - Final Regulations: Treasury Shuts Down SALT Deduction Work-Arounds
United States - Final Regulations: Treasury Shuts Down
This report covers U.S. federal authorities’ efforts to abolish any tax benefit from existing state tax credit programs for individuals with SALT above the deduction limitation.
To subscribe to GMS Flash Alert, fill out the subscription form.
On June 11, 2019, the U.S. Treasury Department (Treasury) and the Internal Revenue Service (IRS) released for publication in the Federal Register final regulations1 regarding the availability of charitable contribution deductions when a taxpayer receives or expects to receive a corresponding state or local tax credit. The IRS also released an advance version of Notice 2019-12,2 which provides for a safe harbor allowing 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.
WHY THIS MATTERS
The 2017 U.S. tax reform legislation,3 commonly referred to as the “Tax Cuts and Jobs Act,” imposed a $10,000 limit on the aggregate amount of state and local income or sales tax and state and local property tax that an individual taxpayer may claim as an itemized deduction. In response, some states acted or proposed to create tax credit programs that would provide relief to their residents affected by the state and local tax (SALT) deduction limitation by providing a state tax credit for certain charitable contributions that would otherwise be deductible on an individual’s federal income tax return. These regulations effectively put a stop to the tax benefit of any existing state tax credit programs for individuals with SALT above the deduction limitation.
In response to state efforts to develop work-arounds to the 2017 U.S. tax law’s limitation on the SALT deduction, the Treasury and IRS issued proposed regulations4 providing rules on the availability of charitable contribution deductions when a taxpayer receives or expects to receive in return a state or local tax credit. According to the preamble, the final regulations, which apply to contributions made after August 27, 2018, generally retain the approach set out in the proposed regulations.
Under the final regulations, a taxpayer making payments to an entity eligible to receive tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return. For example, if a state grants a 70-percent state tax credit pursuant to a state tax credit program, and an itemizing taxpayer contributes $1,000 pursuant to that program, the taxpayer receives a $700 state tax credit. A taxpayer who itemizes deductions must reduce the $1,000 federal charitable contribution deduction by the $700 state tax credit, leaving a federal charitable contribution deduction of $300. The regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the amount transferred. Thus, a taxpayer who receives a state tax deduction of $1,000 for a contribution of $1,000 is not required to reduce the federal charitable contribution deduction to take into account the state tax deduction; and a taxpayer who makes a $1,000 contribution is not required to reduce the $1,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $150.
Notice 2019-12 provides 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 returns. 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).
1 See: T.D. 9864. For another KPMG LLP (U.S.) report on this development, see TaxNewsFlash-United States (no. 2019-298, June 11, 2019) “Final Regulations: State and Local Tax Credits and Charitable Contributions (Text of Regulations).”
2 See: Notice 2019-12.
3 See: Pub. L. No. 115-97.
4 See: REG-112176-18.
The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
The information contained in this newsletter was submitted by the KPMG International member firm in United States.
© 2022 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.