Proposed IRS Regulation

 

The U.S. Treasury Department and the Internal Revenue Service issued a proposed rule on Thursday, August 23, that would limit or eliminate the federal tax deduction for donations receiving state tax credits such as to the Georgia Qualified Education Expense Tax Credit program. Under the proposed IRS rule, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. Since the program in Georgia is a dollar for dollar tax credit, the federal charitable deduction would be eliminated.

The tax reform legislation passed by Congress in 2017 created a cap of $10,000 for state and local tax deductions.  In response, some high tax states, such as New York, New Jersey and Connecticut set up charitable funds for state services and award tax credits for donations to those funds. These new state laws are aimed at preserving a higher federal tax deduction for residents of those states because a charitable deduction is not subject to the cap. The new IRS proposal doesn’t distinguish between these programs aimed at circumventing the new federal state and local tax deduction and programs such as Georgia’s tuition tax credit program and a similar tax credit program for rural hospitals that were in place before the 2017 tax law. 

The rule will undergo a 45-day comment period and does not affect contributions made before August 27, 2018. It is also likely to face legal challenges. For donors to the tuition tax credit program who do not itemize their taxes, the proposed rule would have no effect.

 

For CPA's and Taxpayers concerned about the implications of this proposal on

their participation in the Apogee tax credit program

 

Standard Deduction Taxpayer incurrs NO Cost under the proposed ruling

 

Married standard deduction:  $24,000 (was $12,700 in 2017)

Individual standard deduction:  $12,000 (was $9,350 in 2017)

Typically 70% of taxpayers qualify for the standard deduction.  Under the new tax code, it is estimated that 90% of all taxpayers will fall into the standard deduction category.  Taxpayers taking the Standard Deduction would not be taking the Charitable deduction anways.  Participating in the Apogee tax credit results in NO COST.

 

Itemizing Taxpayers impacted by the $10k max SALT deduction incur No Cost under the proposed ruling

 

Taxpayers who will owe more than $10k in State and Local taxes (including property tax in the calculation) are not permitted, under the new tax code, to deduct any SALT beyond the $10k maximum.  Any amount contributed to Apogee above and beyond the $10k maximum results in a pure WASH or NO COST.  

 

Itemizing taxpayers not impacted by the $10k max SALT deduction Would Be impacted by the Proposed ruling

 

Although this contigent of taxpayers will be quite small, in the event that a taxpayer would be itemizing their Federal return, but have less than $10k in SALT (State and Local taxes incuding Property tax), any amount contributed to Apogee under the propsoed ruling would reduce their available SALT deduction on their Federal return.  The State credit would still stand; however, the lack of deduction for the amount of GA tax liability would create a cost for the taxayer.