The U.S. Department of the Treasury issued new rules and regulations on certain state or local tax credits. The Internal Revenue Service also provided insight into the availability of charitable contribution deductions.
The regulations clarify the relationship between state and local tax credits. This also includes federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.
A taxpayer must reduce the contributions to the amount of the state or local tax credit.
For example, if a taxpayer pays $1,000 to an eligible entity, the state may grant a 70 percent tax credit. On the tax payer’s federal income tax return, it will allow a contribution deduction of $300. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.
The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the contribution on their federal income tax return if the state or local tax credit received or expected to be received is no more than $150.