IRS Proposes Update for Charitable Contributions and State Tax Credits
The IRS, on August 23, issued new proposed regulations that could impact contributions to School Tuition Organizations (STO) and taxpayers donating to the Louisiana Tuition Donation Credit program.
Previous interpretations suggested donors should receive a federal charitable contribution deduction for the full amount contributed to an STO, subject to the current limitations on charitable contributions and itemized deductions. However, it is possible that the regulations proposed by the IRS yesterday will result in no federal charitable contribution deduction for the full amount contributed to an STO.
Some interpretations suggest the proposed regulations issued yesterday will be retroactive to any donations made after 11:59 p.m. Monday, August 27.
Under the August 23 proposed regulations, 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.
For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.
The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.
An STO is a 501(c)(3) nonprofit required by law to spend 95 percent of every donation on scholarships for low-income students in grades K-12.
We will continue to share information regarding changes, clarifications and new guidance as it becomes available. In the meantime, please contact your Ericksen Krentel tax professional or email us if you have any questions or concerns.
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