The 2017 Tax Act adversely impacted individual taxpayers in states with higher taxes by limiting the previously unlimited itemized deduction for income and property taxes to $10,000. On the other hand, the cap for eligible cash charitable contributions (which includes charitable contributions to governments), previously limited to 50% of adjusted gross income was increased to 60% of adjusted gross income.
As a result, a number of state governments, including New York (Client Alert 4/25/18) and now New Jersey, have responded to the newly created tax limitation by promulgating legislation that allows taxpayers to circumvent this limitation by utilizing the charitable contributions deduction. Specifically, at the election of the taxpayer, New Jersey will now grant a property tax credit for up to 90% of property tax payments a New Jersey taxpayer elects to treat as charitable contributions in lieu of the default tax treatment of a property tax payment capped as an itemized deduction at $10,000. Given the higher ceiling on charitable contributions, this should allow many taxpayers to continue to be able to fully deduct on their federal tax returns any payments incurred for New Jersey property tax payments.
Notably, New York has broader legislation and utilized a state tax credit approach for income as well as property taxes. Similar legislation in other states such as California, is still working its way through the legislative process.
While the IRS has announced an intention to challenge such legislation on the grounds that these payments are not truly charitable since the state is according a credit in return for the payment, this is nevertheless now law. As taxpayers are acting under statute, it is unlikely that penalties against taxpayers could be assessed should the Service successfully challenge these provisions.
For more information, contact your Janover Advisor.