On June 11, 2019, the IRS and Treasury issued regulations that limit a taxpayer’s ability to characterize state tax payments as charitable donations. 

Under tax reform, taxpayers generally are permitted to deduct only up to $10,000 of state and local taxes per year for federal income tax purposes. By contrast, charitable donations generally are deductible (subject only to a cap equal to 60% of the taxpayer’s adjusted gross income).

The $10,000 state and local tax deduction limitation gave rise to a number of state-sponsored programs that grant state tax credits to taxpayers who make “charitable donations” to specified causes, including private K-12 schools. These programs allow a taxpayer to effectively pay state taxes (by obtaining a tax credit for the “donation”) while reporting the payment as a deductible donation for federal income tax purposes, thereby circumventing the $10,000 state and local tax deduction limitation.

Under the new regulations, a taxpayer who receives state tax credits in exchange for a “donation” generally must subtract the amount of those credits when determining the amount of the “donation” that is deductible as a charitable donation for federal income tax purposes. For example, if a taxpayer “donates” $100 but receives a $70 tax credit in return, the taxpayer would be permitted to deduct only $30 (i.e., $100 minus $70) as a charitable donation for federal income tax purposes.