Adopted 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 adopted 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 ruling 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 IRS adopted a final ruling regarding this proposal in June 2019.   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 looking for clarity related to how this will impact 

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 are provided a Safe Harbor and are able to claim the Charitible Deduction as if it was State tax liabilty.

 

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 adopted ruling the State credit would still stand and the taxpayer would then be permited to claim the amount expended on the credit as a deduction on their Federal return, effecively treating the credit as if it were a paid State tax liability which is deductible up to the SALT cap max.  

 

For more information regarding the Safe Harbor for Individual Taxpayers who are under the SALT cap but who are still Itemizing, please visit the following link:

https://www.irs.gov/pub/irs-drop/n-19-12.pdf

 

C-CORPORATIONS

 

C-Corps can possibly benefit from this new ruling.  Rather than claim the approved and funded State tax credit, they have now been given the opportunity to claim the amount as a business expense.  This results in a pure reduction in the amount of income claimed on the State return, providing additional savings not realized prior to the adopted ruling.  

 

PASS-THROUGH ENTITIES

 

Pass-through entities are falling into the same boat as the Individual taxpayers.  There is a safe harbor for those Pass-through entities who incur tax liability to the entity itself.  Georgia Pass-through entities do not incur a State imposed tax liability so it is unlikely that the deduction of the credit amount will be avaialable.  

 

For more detailed information about the C_Corp and Pass-through business expense Safe Harbor, please visit the following link:

 https://dor.georgia.gov/sites/dor.georgia.gov/files/related_files/document/LATP/Publication/2019%20QUALIFIED%20EDUCATION%20EXPENSE%20TAX%20CREDIT%20-%20cap%20status%207-31-19.pdf