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Charitable Contributions and Tax Credits

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The IRS recently finalized a series of rules requiring taxpayers to lower certain federal charity-related deductions by any applicable credits they anticipate receiving. Although these regulations, which were proposed last year, but finalized this month, were specifically drafted to help clear up any confusion regarding the relationship between federal deductions for charitable contributions and state tax credits, navigating these issues remains complex, so if you have questions about how your own charitable contribution deductions could affect your state and local tax credits, it is important to speak with an experienced tax return preparation attorney who can advise you. 

Final Regulations

Last month, the IRS finalized a series of regulations related to the relationship between federal deductions for charitable donations and tax credits. These rules require taxpayers who make tax deductible payments to qualifying charities to reduce their federal charitable contributions deduction by:

  • Any state or local credits for which the taxpayer is eligible; or
  • Any state or local credits that the taxpayer expects to receive.

If, for instance, a state allows taxpayers to take a 70 percent tax credit and a taxpayer donates $1,000 to a qualifying state program, he or she could expect to collect a $700 tax credit. The taxpayer must then subtract the $700 tax credit from the $1,000 charitable donation deduction, thereby lowering the federal deduction to $300. It’s important to note that these regulations also apply to any payments made by trusts or a person’s estate. 

Exceptions

There are also a few exceptions to these rules that apply to dollar-for-dollar credits and deductions equalling 15 percent or less of the transferred amount. If, for example, a taxpayer received a state deduction of $1,000 for a donation of the same amount, he or she would not have to reduce the charitable donation deduction. Furthermore, a taxpayer who made a $1,000 payment to a qualifying charity would not have to reduce his or her federal deduction if the state credit does not exceed $150.

There is also a safe harbor that permits taxpayers to treat payments (that were not allowed to be submitted as charitable deductions) as state taxes when calculating their income on their federal tax returns. Qualifying taxpayers can utilize the safe harbor exception when determining their state tax deductions for their 2018 returns. Fortunately, taxpayers who have already submitted their returns could be eligible to claim a larger state and local tax deduction by amending and resubmitting their tax return. However, this is only possible for those who did not claim the $10,000 maximum deduction, or $5,000 for taxpayers who are married, but who are filing separately.

Speak with a Dedicated Florida Tax Return Preparation Attorney

Please contact 386-490-9949 today if you have questions about the new regulations regarding the effects of charitable tax deductions on state and local tax credits and a member of our legal team will help you set up a free one-on-one consultation with experienced Florida tax return preparation lawyer Ronald Cutler, P.A. today.

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