The 2017 Tax Act adversely impacted individual taxpayers in states with higher taxes by limiting the previously unlimited itemized deduction for state and local income and property taxes to $10,000. On the other hand, 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 deductible tax limitation by passing 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 and Connecticut, is still working its way through the legislative process.
On Wednesday May 23, 2018, IRS issued Notice 2018-54 formally announcing an intent to issue Proposed Regulations disallowing such deductions based on substance over form, in effect setting aside such state legislation. While Proposed Regulations do not have the force and effect of law per se, they are a formal statement of IRS views on tax treatment of matters. The Notice is unprecedented, though not unexpected, and likely to find resolution in the courts.
For more information, contact your Janover Advisor.