Charitable Contributions and State and Local Tax Credits New Regulations

Charitable Contributions and State and Local Tax Credits New Regulations Image

New regulations imposed by the US Department of the Treasury and the Internal Revenue Service now require taxpayers to reduce their charitable contribution deduction by the amount of state and/or local tax credits they receive. Taxpayers may also treat any payments made as credits.

As part of the new regulations, taxpayers making charitable payments to entities that can receive tax-deductible contributions must reduce their federal deduction amount by the amount of state or local tax credits they receive in their return.

An example of this would be if a state grants a 70 percent credit for charitable contributions and a taxpayer contributes $1,000 to an entity, the taxpayer will receive $700 as a state tax credit.  In order to itemize deductions, the taxpayer needs to reduce the $1,000 federal charitable contribution by the state tax credit of $700, which leaves a federal charitable contribution deduction of $300.

There are exceptions for the state tax deductions and tax credits that do not exceed 15 percent of the amount transferred. If a taxpayer receives a state tax deduction of $1,000 for a contribution, they are not required to reduce their federal contribution in order to account for the state tax deduction. Also, if a taxpayer makes a $1,000 contribution it is not required for them to reduce their contribution if the state tax credit is no more than $150.

The IRS also is providing a safe harbor for taxpayers who itemize deductions by allowing them to treat payments that will be disallowed as charitable contribution deductions. For those who have already filed may be able to claim a great deduction by filing an amended return if they have not yet claimed the $10,000 maximum ($5,000 for married filing joint).


The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

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