By now, taxpayers with high state tax burdens are all too well aware of the impact the federal Tax Cuts and Jobs Act of 2017 has had in limiting state and local tax deductions to $10,000. We also know states have been proactive in fighting back. For example, New York State has gone as far as enacting legislation enabling local governments and school districts to establish charitable funds so that residents can make “contributions” and receive a tax credit towards the local tax obligation. In other words, through the alchemic magic of the tax law, converting now-capped SALT deductions to much less restricted charitable contributions.
New York State has demonstrated their commitment to make this work and has even established a web link to provide local governments with guidance in setting up the charitable funds. Yet the IRS has been warning of their intention to issue regulations that are likely to undermine the plan.
This leaves both local government officials as well as tax advisers sitting under the proverbial Sword of Damocles. In fear that if a fund is set up, the IRS will ultimately disallow the deduction and the locality will suffer significant administrative costs as well as creating additional tax exposure and possibly penalties to local residents. While also facing the exposure of not providing residents (many of them well-informed tax practitioners) the ability to preserve a large part of the SALT deduction.
While I have not been able to find a scorecard of localities who have set up charitable funds, the Town of Rye and the Village of Rye Brook have already done so. In fact, the inspiration behind today’s blog (I did have another topic in mind) was a copy of a letter handed to me by a colleague from the Superintendent of the nearby Blind Brook-Rye School District explaining why they will not be setting up a charitable fund until the dust settles. The letter is a very well reasoned explanation as to why a wait and see approach seems to make sense at this time.
What do we recommend? Based on the wise words of Superintendent Ross “[w]e will continue to monitor the issue and IRS guidelines when released, and revisit the matter when we know more.” If you have questions about this situation, 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.