The holiday season is upon us and the spirit of gift giving and generosity is permeating everything we do. Those of us who have not given all we want to our favorite charities are rushing to send donations before year-end. Charities, obviously well aware of the donor crunch to get the charitable contribution deduction in the current year are spending significant amounts of their campaign budgets at this very moment. They remind us all, give until it hurts.
Nevertheless, who ever thought we would be receiving such solicitations from our friendly state tax agency? Several states, including New York, New Jersey and Connecticut are responding to the federal Tax Cuts and Jobs Act (TCJA) limit on state and local tax (SALT) deduction by converting your tax liability to a charitable contribution. For those of you non-believers in the art of alchemy, maybe it is time to rethink the matter.
The question I pose to my readers is not such a simple one to answer. While all of us who reside in high tax states (income, property, or both) have been deeply hurt by the TCJA’s limit, do we really want to add “SALT” to the wound? This very question has been the subject of many highly contested debates amongst my colleagues.
The alchemic property lies in the state and/or locality permitting taxpayers to make a contribution to specific charitable funds established under the auspices of the state and in return receiving a partial credit against ones income tax or property tax as the case may be. While mathematically there may have been some savings for high-income taxpayers, the benefit has been significantly reduced or eliminated after one factors in the recent IRS guidance declaring only the portion for which no credit is received on one’s income or property taxes qualifies as a charitable contribution.
Add to this the question remaining, at least in my mind, as to whether we can truly consider a payment to a state or local government, charitable in nature. If I am contributing funds to the “state university” fund, isn’t this dollars my state would have been funding “state university” with, regardless. Sounds like taxes to me.
Now imagine a world (or at least a state) so generous that all of the citizens of that state decided to contribute to the brand new state charitable funds in lieu of making the normal tax payments. In such a world, or New York State for that matter, 85% of the amount contributed to the funds would result in dollar for dollar credits on the donor’s tax return. This would leave a direct tax payment to the state of only 15% of what would have been received otherwise. It seems to me as if these charities need to be very generous to the state’s coiffeurs were this to happen.
If I have raised questions, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.