SALT: IRS issues proposed regs for State Tax Credit for Donation

[SuzBanyan]

Treasury issued proposed regulations today that provide that the federal deduction for a charitable contribution must be reduced by the amount of any state/ local tax credit receieved for such contribution, but need not be reduced by the amount of any state/local tax deduction received for such contribution. There is a de minimus exception proposed if the credit is 15% or less and a proposal to treat a deduction like a credit if it exceeds 100% of the contribution. Although there is some discussion about this being consistent with current law, the proposed regulation states it applies to contributions made after 8/27/18.

The proposed regulation can be read here: https://s3.amazonaws.com/public-inspect ... -18377.pdf

[Jablean]

Treasury issued proposed regulations today that provide that the federal deduction for a charitable contribution must be reduced by the amount of any state/ local tax credit receieved for such contribution, but need not be reduced by the amount of any state/local tax deduction received for such contribution. There is a de minimus exception proposed if the credit is 15% or less and a proposal to treat a deduction like a credit if it exceeds 100% of the contribution. Although there is some discussion about this being consistent with current law, the proposed regulation states it applies to contributions made after 8/27/18.

The proposed regulation can be read here: https://s3.amazonaws.com/public-inspect ... -18377.pdf

Aren't these exactly the same thing? So what they are saying is that state taxes have to be completed before federal?

[rkhusky]

Aren't these exactly the same thing? So what they are saying is that state taxes have to be completed before federal?

One mentions tax credit and the other tax deduction, which are two different things.

[passiveTiger]

Aren't these exactly the same thing? So what they are saying is that state taxes have to be completed before federal?

One mentions tax credit and the other tax deduction, which are two different things.

If you donate $100,000 to California and receive nothing for it, that is a $100,000 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $100,000, that is a $0 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $70,000, that is a $30,000 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $14,999, that is a $100,000 federal charitable deduction.

[FIREchief]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

[passiveTiger]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

[LadyGeek]

Let's use the official source of information: Contributions in Exchange for State or Local Tax Credits, from the Federal Register.

This document is unpublished. It is scheduled to be published on 08/27/2018.

Once it is published it will be available on this page in an official form. Until then, you can download the unpublished version.

The link is the same as the OP, but you can see where it came from.

As a reminder, proposed regulations may be discussed once they have been published for public comment. See: Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:

• Common religious expressions such as sending your prayers to an ailing member.
• Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
• Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
• Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.

Here is the IRS rulemaking process: 32.1.1 Overview of the Regulations Process | Internal Revenue Service

My guess is this is an Advance Notice of Proposed Rulemaking (ANPRM). Close enough. The discussion can continue.

[FIREchief]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

[passiveTiger]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

[FIREchief]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

[passiveTiger]

Does this mean that in the "best" scenario, the taxpayer will be able to deduct their SALT taxes up to the $10K limit and then deduct up to 15% of the excess (on the federal return)?

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

Replace the word “state” with “entity that provides property tax credits in exchange for charitable contributions.”

You should read the document that was linked above at https://www.federalregister.gov/documen ... ax-credits

[passiveTiger]

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

It depends. What percentage of the contribution is returned to you as property tax credits?

You should read the document that was linked above at https://www.federalregister.gov/documen ... ax-credits

[FIREchief]

It means that a property tax bill of $10,000 can be itemized by paying the $10,000 bill.

An $11,500 property tax bill can be itemized by paying $10,000 in property taxes, making an additional charitable contribution of $10,000 to a state entity for which you receive a $1,500 property tax credit, and deducting $10,000 for the charitable contribution. In this scenario, you paid $20,000 for an $11,500 property tax bill, but all $20,000 is deductible.

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

Replace the word “state” with “entity that provides property tax credits in exchange for charitable contributions.”

You should read the document that was linked above at https://www.federalregister.gov/documen ... ax-credits

Okay, let's do that. What would the answer be?

[passiveTiger]

How much would you be able to deduct from your federal taxes if you just paid your $11,500 property tax bill with $11,500?

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

Replace the word “state” with “entity that provides property tax credits in exchange for charitable contributions.”

You should read the document that was linked above at https://www.federalregister.gov/documen ... ax-credits

Okay, let's do that. What would the answer be?

The answer is https://www.federalregister.gov/documen ... ax-credits

[FIREchief]

$10,000.

Thanks. I think I asked that wrong. My intended question was:

How much would you be able to deduct from your federal taxes if you paid your $11,500 state income tax bill with $10,000 cash and a $1,500 "charitable contribution to the state?"

Property taxes adds an additional layer of complexity, because they are typically not imposed at the state level, but at a more local level.

Replace the word “state” with “entity that provides property tax credits in exchange for charitable contributions.”

You should read the document that was linked above at https://www.federalregister.gov/documen ... ax-credits

Okay, let's do that. What would the answer be?

The answer is https://www.federalregister.gov/documen ... ax-credits

A 36 page reading assignment is a whole lot longer answer than I was looking for. Perhaps somebody else can answer this question with an actual (i.e. dollars) answer:

How much would you be able to deduct from your federal taxes if you paid your $11,500 property tax bill with $10,000 cash and a $1,500 charitable contribution to an entity that provides tax credits in exchange for charitable contributions?

I'm guessing it's either $10,225 or $10,000; but if I really knew the answer, I wouldn't be asking the question.

[tfb]

A 36 page reading assignment is a whole lot longer answer than I was looking for. Perhaps somebody else can answer this question with an actual (i.e. dollars) answer:

How much would you be able to deduct from your federal taxes if you paid your $11,500 property tax bill with $10,000 cash and a $1,500 charitable contribution to an entity that provides tax credits in exchange for charitable contributions?

I'm guessing it's either $10,225 or $10,000; but if I really knew the answer, I wouldn't be asking the question.

Against your $1,500 charitable contribution, if you receive $225 or more in tax credit, you get to deduct ($1,500 - amount of tax credit received). If you receive less than $225 in state income tax credit, you get to deduct $1,500. The other $10,000 tax payment is subject to the $10,000 SALT cap together with other SALT payments.

[rkhusky]

My state used to have a credit, where if you contributed $100 to a food pantry, you received a $50 state tax credit (double for MFJ). I presume this rule would not allow you to claim a contribution like that on your federal taxes.

My state still has a credit where, if you spend money to fix up a historic building, you can receive a 25% state tax credit. But that credit is reduced by the amount you are claiming on the federal Investment Credit tax form 3468. Presumably this is still okay, given that you are not claiming a federal charitable contribution and also because the state is reducing the credit by the federal credit.

[Tanelorn]

Thanks for the update. The general result seems unsurprising.

[Miakis]

The attitude in the accounting community is that the tax credit for donation schemes will probably not work out, but do keep in mind that a Reg can be challenged in court. The 15% deminimis number is arbitrary. For this year, it's interesting that they've given folks 3 days to donate and still get a deduction! If I were in a state that offered this, I'd probably go ahead and write that check.

I've heard/read a lot of opinions that New York's optional payroll tax has legs. Not sure what the true incentive for an employer would be to opt into the optional payroll tax, but for self-employed individuals who W-2 themselves, it's a no brainer to opt in.

[Tanelorn]

Nevermind

[rkhusky]

The 15% deminimis number is arbitrary.

Not completely arbitrary. They don't want to apply this cap to tax deductions, just tax credits. So, the 15% is probably the max that a person in the highest taxed state would get with a tax deduction.

[ryman554]

Aren't these exactly the same thing? So what they are saying is that state taxes have to be completed before federal?

One mentions tax credit and the other tax deduction, which are two different things.

If you donate $100,000 to California and receive nothing for it, that is a $100,000 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $100,000, that is a $0 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $70,000, that is a $30,000 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $14,999, that is a $100,000 federal charitable deduction.

If you donate $100,000 to California and receive a California property tax credit of $15,001, that is a $74,999 federal charitable deduction.

That's a pretty steep cliff to get wrong.

[FIREchief]

A 36 page reading assignment is a whole lot longer answer than I was looking for. Perhaps somebody else can answer this question with an actual (i.e. dollars) answer:

How much would you be able to deduct from your federal taxes if you paid your $11,500 property tax bill with $10,000 cash and a $1,500 charitable contribution to an entity that provides tax credits in exchange for charitable contributions?

I'm guessing it's either $10,225 or $10,000; but if I really knew the answer, I wouldn't be asking the question.

Against your $1,500 charitable contribution, if you receive $225 or more in tax credit, you get to deduct ($1,500 - amount of tax credit received). If you receive less than $225 in state income tax credit, you get to deduct $1,500. The other $10,000 tax payment is subject to the $10,000 SALT cap together with other SALT payments.

Thank you. It appears you've digested this and understand it well. To somebody who hasn't invested the time to read and absorb the whole 36 page document, it sounds like this will render any schemes the high tax states come up with to "defeat" the SALT deduction limits largely useless. Is that how you see it? I believe that the states' original intentions were to make it so that a person could pay any SALT taxes above the $10K limit as "charitable contributions" which would have been 100% deductible on the federal taxes as an itemized deduction (thus, defeating the $10K limit). Is that generally correct?

[FIREchief]

If I were in a state that offered this, I'd probably go ahead and write that check.

Really? It sounds like unless you truly believed in the charitable cause (your state??), you would be wasting money.

[Artsdoctor]

I'm not too surprised that the Treasury would try to stop this, but I am (a little) surprised that all of the existing programs in place would most likely go away as well. For several years, many states (regardless of political predominance) have allowed contributions to college tuition programs in exchange for a state tax credit and federal charitable contribution item. These would all disappear as well.

This will probably come down to the wire this year and I don't think I'd want to be the test case for 2018 tax law.

[nyinvestor718]

New York, where I reside, has an interesting workaround that may not fall under the current proposal:

https://www.tax.ny.gov/bus/ecep/ecepdx.htm

Essentially, if you are an employer, you may opt-in to the ECEP program, pay 1.5% above $40,000 of wages for each employee, in which they would receive a tax credit from NYS.

This is a no brainer for those business owners on their own W2 however, it's an all or nothing opt-in meaning, you must pay into the ECEP for all employees making above $40,000 in wages.

Example: employee A is paid $100,000 in wages, assuming no deductions (401k), $100,000 - $40,000 = $60,000. 60,000 * 1.5% = $900.
The employer will pay S900 to NYS, broken up into quarterly payments. Employee A will get a credit for $900 from NYS. The law explicitly states that the ECEP may not be withheld from the employees payroll.

Reading the proposal, it was unclear as to whether all tax credits from your state would be deducted from charitable contributions for the purposes of itemizing on your federal return. Once may get clever and simply increase payroll allowances, so that no money is credited at the end of the year.

Interesting to see how this plays out.

[rkhusky]

Reading the proposal, it was unclear as to whether all tax credits from your state would be deducted from charitable contributions for the purposes of itemizing on your federal return.

There needs to be a direct connection between the charitable contribution and the received benefit in order to be disallowed.

[nyinvestor718]

Reading the proposal, it was unclear as to whether all tax credits from your state would be deducted from charitable contributions for the purposes of itemizing on your federal return.

There needs to be a direct connection between the charitable contribution and the received benefit in order to be disallowed.

So, it appears, the ECEP program, since it's not a charitable program, may in fact remain a viable workaround...

[afan]

Please remember that this is a proposal, not a final regulation. The underlying issues are political and there may well be legal challenges to whatever final regulation is issued. We are a long way from resolution. There is plenty of time this year to let the dust settle. Even if your state finds a maneuver that works it will be months at least before you know that.

Other than idle curiosity, I don't see anything to chase at this point. Once the rule making, legal arguments and political fighting are over you will know where you stand. Just be glad there is a chance this will become clear by the end of 2018.

Everything is up in the air now.

[nyinvestor718]

Please remember that this is a proposal, not a final regulation. The underlying issues are political and there may well be legal challenges to whatever final regulation is issued. We are a long way from resolution. There is plenty of time this year to let the dust settle. Even if your state finds a maneuver that works it will be months at least before you know that.

Other than idle curiosity, I don't see anything to chase at this point. Once the rule making, legal arguments and political fighting are over you will know where you stand. Just be glad there is a chance this will become clear by the end of 2018.

Everything is up in the air now.

The proposal takes effect, 8/27/2018. Not too far away. Curious as to how the IRS will react to what I had mentioned above.

[rkhusky]

So, it appears, the ECEP program, since it's not a charitable program, may in fact remain a viable workaround...

Under these rules, yes. The ECEP program looks a bit clunky though and I am not sure where the savings come in. I presume the intent is for the state, employee and employer to break even, and the federal government to absorb the cost. Will the ECEP payment count as a federal deductible business expense? If so, how much should the employer reduce the employee’s pay, so that they break even?

[nyinvestor718]

So, it appears, the ECEP program, since it's not a charitable program, may in fact remain a viable workaround...

Under these rules, yes. The ECEP program looks a bit clunky though and I am not sure where the savings come in. I presume the intent is for the state, employee and employer to break even, and the federal government to absorb the cost. Will the ECEP payment count as a federal deductible business expense? If so, how much should the employer reduce the employee’s pay, so that they break even?

The employer bares the cost. The state transfers the tax back to the employee as a credit. No deductions are made. The employer may get clever and reduce compensation by the amount credited, which appears to be on the right side of the ECEP law, since it only bars wage withholding, not changes in compensation.

Resulting effect, the employee received the credited amount tax free, to the employer, a deductible expense.
The employee would change NYS payroll allowances to reflect the credit received, so that nothing as refunded from the state come tax time.

[Big Dog]

^^of course, the ECEP credit/offset only applies to NYS residents. Not sure what happens to those living in Jersey (or CT), but are working for a Manhattan employer who chooses this route.

[TBillT]

Quite a few states (eg; Virginia) already historically allow up to 65% state tax credit for approved in-state charities, which I am considering.

I think the new law is saying:
Qualified "State" Donation: $10,000
State tax Credit (e.g. Va.): $6,500
Deductible on Fed Taxes: $3,500 (previously we could deduct all $10,000)

Seems more fair now with new rule. Still, pending doing some tax math, for example if you have appreciated stocks to donate, this can be powerful approach under the new Trump tax law.

Basically the loss of deducting the full $10,000 on Schedule-A is a negative, but this offset by the positive of getting over the SALT $10k limit.

In Virginia, we call this scheme the Neighborhood Assistance Program, and it is basically a legal perk for higher income folks, sorry to say.

[rkhusky]

The employer bares the cost. The state transfers the tax back to the employee as a credit. No deductions are made. The employer may get clever and reduce compensation by the amount credited, which appears to be on the right side of the ECEP law, since it only bars wage withholding, not changes in compensation.

Resulting effect, the employee received the credited amount tax free, to the employer, a deductible expense.
The employee would change NYS payroll allowances to reflect the credit received, so that nothing as refunded from the state come tax time.

If the employer does not reduce compensation, they are giving the employee a raise. If the employer reduces compensation to match, they do not have an additional business expense. Still trying to see how money flows from feds -> employer/employee/state under the new rule. Or is the employer bearing the brunt of the reduction in state tax for the employee?

[nyinvestor718]

The employer bares the cost. The state transfers the tax back to the employee as a credit. No deductions are made. The employer may get clever and reduce compensation by the amount credited, which appears to be on the right side of the ECEP law, since it only bars wage withholding, not changes in compensation.

Resulting effect, the employee received the credited amount tax free, to the employer, a deductible expense.
The employee would change NYS payroll allowances to reflect the credit received, so that nothing as refunded from the state come tax time.

If the employer does not reduce compensation, they are giving the employee a raise. If the employer reduces compensation to match, they do not have an additional business expense. Still trying to see how money flows from feds -> employer/employee/state under the new rule. Or is the employer bearing the brunt of the reduction in state tax for the employee?

Correct however, that portion credited to the employee is tax free.

[my2swedes]

Quite a few states (eg; Virginia) already historically allow up to 65% state tax credit for approved in-state charities, which I am considering.

I think the new law is saying:
Qualified "State" Donation: $10,000
State tax Credit (e.g. Va.): $6,500
Deductible on Fed Taxes: $3,500 (previously we could deduct all $10,000)

Seems more fair now with new rule. Still, pending doing some tax math, for example if you have appreciated stocks to donate, this can be powerful approach under the new Trump tax law.

Basically the loss of deducting the full $10,000 on Schedule-A is a negative, but this offset by the positive of getting over the SALT $10k limit.

In Virginia, we call this scheme the Neighborhood Assistance Program, and it is basically a legal perk for higher income folks, sorry to say.

In Virginia, the Education Improvement Scholarship Program also follows the same scheme. Last year, we benefited a lot from contributing greatly appreciated securities to a scholarship organization in exchange for a 65% tax credit. (We actually came out ahead financially)
Apparently we didn’t apply for the credits in time this year for the same benefit. We’ll have to run the numbers to see how much this reg reduces the benefits.

[TBillT]

Quite a few states (eg; Virginia) already historically allow up to 65% state tax credit for approved in-state charities, which I am considering.

I think the new law is saying:
Qualified "State" Donation: $10,000
State tax Credit (e.g. Va.): $6,500
Deductible on Fed Taxes: $3,500 (previously we could deduct all $10,000)

Seems more fair now with new rule. Still, pending doing some tax math, for example if you have appreciated stocks to donate, this can be powerful approach under the new Trump tax law.

Basically the loss of deducting the full $10,000 on Schedule-A is a negative, but this offset by the positive of getting over the SALT $10k limit.

In Virginia, we call this scheme the Neighborhood Assistance Program, and it is basically a legal perk for higher income folks, sorry to say.

In Virginia, the Education Improvement Scholarship Program also follows the same scheme. Last year, we benefited a lot from contributing greatly appreciated securities to a scholarship organization in exchange for a 65% tax credit. (We actually came out ahead financially)
Apparently we didn’t apply for the credits in time this year for the same benefit. We’ll have to run the numbers to see how much this reg reduces the benefits.

Yes I too was waiting for this ruling...probably I could have guessed this outcome, makes some sense.
I was afraid to make the big donation and then not having the deduction.

[libralibra]

post removed

[trueblueky]

I'm not too surprised that the Treasury would try to stop this, but I am (a little) surprised that all of the existing programs in place would most likely go away as well. For several years, many states (regardless of political predominance) have allowed contributions to college tuition programs in exchange for a state tax credit and federal charitable contribution item. These would all disappear as well.

This will probably come down to the wire this year and I don't think I'd want to be the test case for 2018 tax law.

Not just college.

In Florida, corporations that donate to private schools get a dollar for dollar tax credit. This was created to get around a constitutional prohibition on giving state funds to private schools. The state court decided that people opposed to the credit do not have standing.

[SuzBanyan]

In the explanation accompanying the proposed regulation, the issue of existing state tax credit programs for educational scholarship was directly addressed and additional guidance requested as part of the public comments. However, in general, there did not appear to be a high level of concern as the “Treasury Department and the IRS believe ... that the proposed regulations will have at most a highly limited, marginal effect on taxpayer decisions to donate to tax credit programs that pre-date TCJA, including educational scholarship programs.”

I read this to mean that the IRS believes that donations to such scholarship programs would be made by most taxpayers even if a more limited federal tax deduction for the net donation minus credit was all that was allowed.

Apparently 33 states had such state tax credits for donation programs at the time the federal tax law was passed last year. They were primarily used by taxpayers under AMT, for which the SALT limit was essentially $0.

The state tax credit programs are described in the appendix of this report: Bankman, Joseph and Gamage, David and Goldin, Jacob and Hemel, Daniel Jacob and Shanske, Darien and Stark , Kirk J. and Ventry, Dennis J. and Viswanathan, Manoj, State Responses to Federal Tax Reform: Charitable Tax Credits (April 30, 2018). State Tax Notes, Vol. 159, No. 5, 2018; UCLA School of Law, Law-Econ Research Paper No. 18-02; UC Hastings Research Paper No. 264. Available at SSRN: https://ssrn.com/abstract=3098291 or http://dx.doi.org/10.2139/ssrn.3098291

[vinnydabody]

Please remember that this is a proposal, not a final regulation. The underlying issues are political and there may well be legal challenges to whatever final regulation is issued. We are a long way from resolution. There is plenty of time this year to let the dust settle. Even if your state finds a maneuver that works it will be months at least before you know that.

Other than idle curiosity, I don't see anything to chase at this point. Once the rule making, legal arguments and political fighting are over you will know where you stand. Just be glad there is a chance this will become clear by the end of 2018.

Everything is up in the air now.

The proposal takes effect, 8/27/2018. Not too far away.

Not quite. This is a proposed regulation, which may not be finalized for some time (they certainly can't finalize the regulation before the end of the public comment period -- October 11 -- and the preamble to any final regulations will have to address the comments). This is, as far as I can tell, the first regulatory action Treasury has published with respect to the Tax Cut and Jobs Act - everything up to this point has been IRS notices that they were working on regulations covering various issues (including this one; see Notice 2018-54). The regulation may not be finalized before the end of the year, and that's assuming Treasury works with lightning speed on this project with no bumps or roadblocks. Treasury may issue temporary regs while working on finalizing the proposed regs. Treasury may even hold off on finalizing the regs for quite a while, depending on how things shake out. There are plenty of examples of unpopular regulations that were proposed and never finalized, or proposed, finalized, and then ultimately withdrawn.

Bottom line, if (big if) this regulation is made final as currently written, it would be effective retroactive to August 27. But it may not be finalized in its current form. Until it's made final, like afan says, there's no direct authoritative guidance to rely on (although the proposed regs give us an idea of the legal theories Treasury/IRS would argue if they were going up against a taxpayer on the issue).

[rkhusky]

Correct however, that portion credited to the employee is tax free.

With a very simplified example, suppose $100K in taxable income, $15K in state tax, then employee would pay federal tax on $85K under old rules. With the new cap of SALT, employee would pay federal tax on $90K (can only deduct $10K).

With ECEP, assuming no employee pay reduction, $100K in taxable income, $15K in state tax, employer sends $5K to the state which is credited to the employee, employee pays fed tax on $90K, employer gets additional business expense of $5K. Compared to the SALT cap rules, state still gets $15K, employer is paying additional (1-business tax)*$5K, employee is getting additional $5K, feds are getting the same.

With ECEP, assuming employee's taxable income is dropped to $95K. Then employee pays $14K in state tax, employer sends $5K to the state which is credited to the employee. Employee pays fed tax on $85K, employer has no additional business expense. Compared to the SALT cap rules, state gets $1K less, employer is paying the same, employee is getting fed tax*$5K more, feds are getting fed tax*$5K less.

[SuzBanyan]

Please remember that this is a proposal, not a final regulation. The underlying issues are political and there may well be legal challenges to whatever final regulation is issued. We are a long way from resolution. There is plenty of time this year to let the dust settle. Even if your state finds a maneuver that works it will be months at least before you know that.

Other than idle curiosity, I don't see anything to chase at this point. Once the rule making, legal arguments and political fighting are over you will know where you stand. Just be glad there is a chance this will become clear by the end of 2018.

Everything is up in the air now.

The proposal takes effect, 8/27/2018. Not too far away.

Not quite. This is a proposed regulation, which may not be finalized for some time (they certainly can't finalize the regulation before the end of the public comment period -- October 11 -- and the preamble to any final regulations will have to address the comments). This is, as far as I can tell, the first regulatory action Treasury has published with respect to the Tax Cut and Jobs Act - everything up to this point has been IRS notices that they were working on regulations covering various issues (including this one; see Notice 2018-54). The regulation may not be finalized before the end of the year, and that's assuming Treasury works with lightning speed on this project with no bumps or roadblocks. Treasury may issue temporary regs while working on finalizing the proposed regs. Treasury may even hold off on finalizing the regs for quite a while, depending on how things shake out. There are plenty of examples of unpopular regulations that were proposed and never finalized, or proposed, finalized, and then ultimately withdrawn.

Bottom line, if (big if) this regulation is made final as currently written, it would be effective retroactive to August 27. But it may not be finalized in its current form. Until it's made final, like afan says, there's no direct authoritative guidance to rely on (although the proposed regs give us an idea of the legal theories Treasury/IRS would argue if they were going up against a taxpayer on the issue).

I agree it is possible that final regulations will not be issued until after the end of the year. As you may recall, all IRS regulation must now be reviewed by the OMB, as well as Treasury/IRS, which is likely to slow finalization down.

Until then, although not “precedential” according to the proposed regulations, I believe that the IRS Chief Counsel Advice Memorandum 201105010 issued in 2010/2011 may be the most applicable “authoritative” guidance. It states that the value of a state tax credit does not reduce the value of a charitable contribution deduction, except possibly in “unusual circumstances.” Notice 2018-54 you referenced is also “authoritative” but may not be sufficiently detailed to contradict the CCA.

[Two Headed Mule]

Correct however, that portion credited to the employee is tax free.

With a very simplified example, suppose $100K in taxable income, $15K in state tax, then employee would pay federal tax on $85K under old rules. With the new cap of SALT, employee would pay federal tax on $90K (can only deduct $10K).

With ECEP, assuming no employee pay reduction, $100K in taxable income, $15K in state tax, employer sends $5K to the state which is credited to the employee, employee pays fed tax on $90K, employer gets additional business expense of $5K. Compared to the SALT cap rules, state still gets $15K, employer is paying additional (1-business tax)*$5K, employee is getting additional $5K, feds are getting the same.

With ECEP, assuming employee's taxable income is dropped to $95K. Then employee pays $14K in state tax, employer sends $5K to the state which is credited to the employee. Employee pays fed tax on $85K, employer has no additional business expense. Compared to the SALT cap rules, state gets $1K less, employer is paying the same, employee is getting fed tax*$5K more, feds are getting fed tax*$5K less.

The expectation is that the employee's "pay" and therefore taxable income will drop by the amount of the "tax" (since it redounds to the employee's benefit as a state tax credit). The key here is that, despite first appearances, the state is not made worse off with ECEP because of the way that the employee's credit is calculated. The only loser is the Feds.

Simple example:

$99,000K of income and a state tax rate of 10%.

Scenario 1 -- No ECEP: employee pays state tax of 9.9K.

Scenario 2 -- ECEP of 9K (just for ease of math): state (and federal) taxable income of 90K -- so state tax of 9K for employee. It looks like the state is out $900 compared to No ECEP, but the employee does not get the full 9K credit. The credit is essentially equal to 90% of the employer "tax" (1 minus tax rate). So the employee credit would be $8,100. Therefore, State receives the same 9.9K as in the No ECEP scenario (9K from employer and 900 that employee owes on tax return). So the state result is a wash, but federal taxable income is 9K lower.

One very notable thing about ECEP is that it is arguably a bigger revenue threat than the charitable contribution tax credit issue (that began the discussion) because it allows even non-itemizers to effectively deduct their state income tax.

Mule

[rkhusky]

The expectation is that the employee's "pay" and therefore taxable income will drop by the amount of the "tax" (since it redounds to the employee's benefit as a state tax credit). The key here is that, despite first appearances, the state is not made worse off with ECEP because of the way that the employee's credit is calculated. The only loser is the Feds.

Simple example:

$99,000K of income and a state tax rate of 10%.

Scenario 1 -- No ECEP: employee pays state tax of 9.9K.

Scenario 2 -- ECEP of 9K (just for ease of math): state (and federal) taxable income of 90K -- so state tax of 9K for employee. It looks like the state is out $900 compared to No ECEP, but the employee does not get the full 9K credit. The credit is essentially equal to 90% of the employer "tax" (1 minus tax rate). So the employee credit would be $8,100. Therefore, State receives the same 9.9K as in the No ECEP scenario (9K from employer and 900 that employee owes on tax return). So the state result is a wash, but federal taxable income is 9K lower.

It appears then that, in this example, the employee gets (fed rate - state rate)*$9K more under ECEP.

[Two Headed Mule]

The expectation is that the employee's "pay" and therefore taxable income will drop by the amount of the "tax" (since it redounds to the employee's benefit as a state tax credit). The key here is that, despite first appearances, the state is not made worse off with ECEP because of the way that the employee's credit is calculated. The only loser is the Feds.

Simple example:

$99,000K of income and a state tax rate of 10%.

Scenario 1 -- No ECEP: employee pays state tax of 9.9K.

Scenario 2 -- ECEP of 9K (just for ease of math): state (and federal) taxable income of 90K -- so state tax of 9K for employee. It looks like the state is out $900 compared to No ECEP, but the employee does not get the full 9K credit. The credit is essentially equal to 90% of the employer "tax" (1 minus tax rate). So the employee credit would be $8,100. Therefore, State receives the same 9.9K as in the No ECEP scenario (9K from employer and 900 that employee owes on tax return). So the state result is a wash, but federal taxable income is 9K lower.

It appears then that, in this example, the employee gets (fed rate - state rate)*$9K more under ECEP.

The savings should be fed rate * 9K. The design of the program is simply to restore the lost federal deduction without disturbing anything else -- hence all of the various moving parts. The state is paid the same in both cases (9.9K), but in Scenario 2 fed taxable income is 90K rather than 99K in Scenario 1.

[rkhusky]

It appears then that, in this example, the employee gets (fed rate - state rate)*$9K more under ECEP.

The savings should be fed rate * 9K. The design of the program is simply to restore the lost federal deduction without disturbing anything else -- hence all of the various moving parts. The state is paid the same in both cases (9.9K), but in Scenario 2 fed taxable income is 90K rather than 99K in Scenario 1.

You are correct.

[rkhusky]

One very notable thing about ECEP is that it is arguably a bigger revenue threat than the charitable contribution tax credit issue (that began the discussion) because it allows even non-itemizers to effectively deduct their state income tax.

Yes, a state could launder all salary, such that all employees in the state had zero federal taxable income, while still collecting state taxes on that income. I imagine that Treasury will use some sort of step doctrine argument to disallow this scheme. The ECEP tax credits are clearly wages, even if they pass through the state coffers.

[Two Headed Mule]

One very notable thing about ECEP is that it is arguably a bigger revenue threat than the charitable contribution tax credit issue (that began the discussion) because it allows even non-itemizers to effectively deduct their state income tax.

Yes, a state could launder all salary, such that all employees in the state had zero federal taxable income, while still collecting state taxes on that income. I imagine that Treasury will use some sort of step doctrine argument to disallow this scheme. The ECEP tax credits are clearly wages, even if they pass through the state coffers.

I agree. The argument is that this just a convoluted withholding regime -- there is (in substance) no separate employer "tax" (as evidenced by it being a credit against the employee's state tax). They are simply collecting employee tax from wages and calling it something different.

Mule