New Jersey Governor Phil Murphy signed into law May 4th, 2018 the State and Local Tax Deduction bill that would allow New Jersey municipalities to create charitable funds through which NJ taxpayers can donate in exchange for a tax credit of up to 90% of their donation to reduce their property tax bill. Generally, the charitable deduction would then be fully deductible on the federal income tax return. The legislation will go into effect in July 2018.
One of the largest revenue generators in the Tax Cuts and Jobs Act of 2017 was the limitation of the state and local tax deduction (referred to as “SALT” deduction) to $10,000 on the federal income tax return. Previously, there was no limitation on this deduction (although many high income earners did not get the full benefit of their SALT deduction because of the Alternative Minimum Tax or “AMT”). The SALT deduction includes property taxes, state sales and income taxes and municipal income taxes. The average SALT deduction in the State of NJ was around $18,000 in 2016. This change, combined with the reduction in mortgage interest deduction and some other changes to itemized deductions, will pay for about $1.3 trillion of the tax cuts passed. The impact of the SALT deduction will be felt the most in the highest tax states such as New York, California, New Jersey and a few others, most of which are predominantly Democratic majority states. All three of these states and a few others are planning workarounds to the federal SALT deduction limitation.
Will the Workaround actually Work?
Just because NJ passed a law that could potentially enable some or all of a person’s real estate taxes to be considered a charitable contribution does not necessarily mean the Internal Revenue Service or “IRS” will accept it. The arguments against this workaround stem from the IRS requirement that in order for a charitable contribution to be deductible there has to be charitable intent and the donor must receive nothing in return or, if they do receive something in return, must deduct the value of what they receive in return from their contribution. In addition, if you make a contribution that imposes a liability on the recipient (like say trash pickup or police services) then the liability disallows the contribution. The arguments in favor of this workaround point to prior systems that have been around since 2014 in certain states that allowed citizens to donate to a state general fund to support students’ higher education and receive a tax deduction on their federal return. The difference, though, between those programs and the ones being proposed and implemented now, is that these contributions were not in lieu of local property taxes.
What to Do?
Unfortunately, the best advice for now is to probably do nothing. Many lawyers and tax accountants are advising their clients to take a “wait and see” approach. There is just too much uncertainty surrounding the whole workaround to give sound advice at this juncture. Stay tuned.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Francis C. Thomas CPA, PFS
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)