Main Street Practitioner Blog

The IRS today issued Notice 2018-54, which announces forthcoming regulations that will address the "tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes."  A press release accompanying the notice is available here.

Under the Tax Cuts and Jobs Act, the amount of state and local taxes individuals can deduct is capped at $10,000. Since the law's enactment late last year, several states have debated proposals to allow residents to contribute to certain entities to gain a credit (most often for a charitable contribution) against state and local taxes owed.  In particular, New Jersey Governor Phil Murphy signed legislation allowing local governments to set up charitable organizations that can accept property tax payments. In turn, homeowners can declare those “donations” as gifts to offset federal taxable income. New York Governor Andrew Cuomo signed similar legislation last month.  Earlier this year, Treasury Secretary Steven Mnuchin called the workaround “ridiculous.”

The Treasury Department and IRS intend to propose regulations addressing measures that would allow homeowners to declare property taxes as charitable deductions, which are still unlimited, according to the IRS.

"The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance over-form principles, govern the federal income tax treatment of such transfers," the IRS explains. The regulations will aim to help taxpayers understand the "relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments."

The regulations will be issued "in the near future," the IRS says.