During the first half of the year, we encouraged high income earners to consider programs like the Georgia HEART program or student scholarship organizations, which allowed Georgia taxpayers to make a donation up to a specified amount, and receive a tax credit toward their Georgia income tax liability. Taxpayers would also be eligible to claim an equal charitable deduction on their federal income tax return. Unfortunately, the IRS released proposed regulations that will limit the tax benefits of these programs going forward for individuals.
Georgia’s Rural Hospital Tax Credit, created in 2016 and provided through the Georgia HEART program, allows taxpayers to donate to rural hospitals in the state that have a significant financial need. The Georgia’s Qualified Education Expense Tax Credit Program, which began in 2008, funds scholarships at private schools in Georgia, through multiple student scholarship organizations.
That said, the Georgia legislature has supported these programs for many years. The reason these programs have been receiving so much attention is because the Tax Cuts and Jobs Act, passed in December 2017, bundles your state and local tax (SALT) with your property taxes and limits the deduction to $10,000. For most taxpayers, this wasn’t a significant change; however, those who are high-income earners started taking a closer look at these legitimate programs. The IRS scrutiny began when high-income tax states like New York, California, New Jersey, and Connecticut, started creating workarounds to ensure their state taxpayers weren’t affected by what they deemed as party politics.
The IRS’ proposed regulations primarily target new and existing programs, specifically in instances when a taxpayer makes a payment or transfers property to or for the use of a nonprofit entity and the taxpayer receives, or expects to receive, a state or local tax credit in return for such payment. The tax credit then constitutes a return benefit, or quid pro quo to the taxpayer, thus reducing the charitable contribution deduction. In reality, the quid pro quo standard is not new to the IRS; however, they are now looking to enforce it across the board.
For example, under the old rules, a $2,500 contribution would provide a $2,500 state tax credit and $2,500 charitable donation, resulting in a tax benefit of $3,375, assuming a 35% federal tax rate. Under the proposed regulations, a $2,500 contribution would provide a $2,500 state credit and $0 charitable donation, resulting in a tax benefit of only $2,500.
The proposed regulations also include a de minimis exception under which a taxpayer may disregard a state or local tax credit if such credit does not exceed 15% of the taxpayer’s payment or 15% of the fair market value of the property transferred by the taxpayer.
The good news is that the proposed regulations would apply to contributions after Aug. 27, 2018, so if you applied for and funded a charitable donation prior to this date, you should still receive the full tax benefits for the 2018 tax year. Furthermore, there is still a comment period during which groups will be advocating for preserving the full federal deductibility of state income tax credit-eligible contributions. However, if the proposed regulations become final, these programs will not provide the same tax benefit they have in the past to individual taxpayers.
Tax laws frequently change, so before you make moves in anticipation of a tax benefit, you should consult your C.P.A. or the experts at Henssler Financial will be glad to help: