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IRS Makes Clear – Tax Credits Received in Exchange for Charitable Contributions to Taxing Authorities Are Not Deductible

Late last week, the IRS issued proposed regulations which address programs adopted by state and local governments which permit a taxpayer to make a contribution to a local taxing authority in exchange for a credit against the taxpayer’s local property tax liability. Unsurprisingly, the proposed regulations clarify that the receipt of the tax credit constitutes a quid pro quo the value of which, under longstanding principles of tax law, must be excluded from the deductible portion of the donation. In other words, a taxpayer will be entitled to a deductible charitable contribution only to the extent the payment made to the local taxing authority exceeds the amount of the tax credit the taxpayer receives in exchange for it. The proposed regulations, however, include a de minimisexception to this rule, allowing taxpayers to disregard state tax credits that do not exceed 15% of the taxpayer’s payment.

The following example from the proposed regulations illustrates the limitation:

“A, an individual, makes a payment of $1,000 to X [a political subdivision of a State]. In exchange for the payment, A receives or expects to receive a state tax credit of 70% of the amount of A’s payment to X. . . . A’s charitable contribution deduction is reduced by $700 (70% x $1,000). This reduction occurs regardless of whether A is able to claim the state tax credit in that year. Thus, A’s charitable contribution deduction for the $1,000 payment to X may not exceed $300.”

As a result, anyone planning to make a contribution to a state or local authority as described above for the sole purpose of increasing the amount of his allowable itemized deductions may want to reconsider those plans.
If you have any questions about this proposal, please do not hesitate to contact Tiffany Donio at tdonio@archerlaw.com or any member of our Tax Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, in Philadelphia, Pa., at (215) 963-3300, New York, N.Y. at (212) 682-4940 or in Wilmington, Del., at (302) 777-4350.
DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.