AFP Submits Comments on IRS Proposal Limiting Charitable Deduction for State and Local Tax Credits

AFP has submitted comments to the Internal Revenue Service (IRS) about a proposed rule that would clarify the relationship between the federal charitable deduction and state and local tax credits.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. 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 $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

AFP is very concerned about the impact of the rule on charitable giving in states that have long-standing state and local tax credits to incentivize charitable giving.  Given the potential negative impacts of the proposed rule on states with long-standing SALT credits, AFP recommended either rescinding the proposed rule or amending it to ensure that it does not decrease charitable giving incentivized by these tax credits.

The text of AFP’s submission is below:

Ms. Merrill D. Feldstein and Ms. Mon Lam
Office of Associate Chief Counsel
Income Tax & Accounting
Internal Revenue Service
CC:PA:LPD:PR (REG-112176-18)
Room 5203
P.O. Box 7604
Ben Franklin station
Washington, D.C. 20044

Re: Notice of Proposed Rulemaking/Contributions in Exchange for State and Local Tax Credits

Dear Ms. Feldstein and Ms. Lam:

On behalf of the Association of Fundraising Professionals (AFP), I am writing to provide comments regarding the proposed rulemaking/contributions in exchange for state and local tax credits (REG-112176-18). We appreciate the opportunity to comment on this proposal and look forward to collaborating with you to address these issues.

Since 1960, AFP has inspired global change and supported efforts that generated over $1 trillion in charitable contributions. AFP's nearly 31,000 individual and organizational members raise over $115 billion every year, equivalent to more than one-quarter of all charitable giving in North America and millions more around the world. AFP also has the only enforceable code of ethics in the fundraising profession, and all members are required to affirm their support of it annually.

Americans have a rich tradition of supporting charitable organizations and gave more than $400 billion to philanthropic causes in 2017, according to Giving USA. In many cases, that charitable giving is incentivized because we as a country believe that charities have a critical role to play in society. Charities can often offer programs and services that government cannot offer or can be offered more effectively and efficiently through a charity.

These incentives are important because they encourage people to give. But in addition, research has shown that incentives play a role in deciding how much a donor gives, especially as the size of the gift being considered grows. Thus, limiting or denying giving incentives can significantly impact charitable giving.

Accordingly, we are very concerned about the impact of the proposed rule on state and local tax (SALT) credits to incentivize giving that were enacted many years before passage of the Tax Cuts and Jobs Act. These types of tax credits have positively affected communities in those states, funding charitable programs and services affecting a variety of issues, including education, healthcare, housing, and many more. Limiting these existing state tax credits will have a detrimental impact on the level of charitable giving in those states.

Given the potential negative impacts of the proposed rule on states with long-standing SALT credits, we recommend either rescinding the proposed rule or amending it to ensure that it does not decrease charitable giving incentivized by these tax credits.

We understand that state legislatures are considering or adopting proposals to create new SALT credit programs with the aim of enabling taxpayers to claim charitable contributions that are fully deductible for federal tax purposes, while also providing the taxpayer with a dollar-for-dollar offset of SALT liabilities. It is noted that there is a concern regarding potential significant revenue losses that would “undermine and be inconsistent with the limitation on the deduction for state and local income taxes adopted by Congress in section 165 (b)(6).” However, the proposed regulations should be narrowly crafted to address these new programs without undermining pre-existing programs that have effectively served communities for years.

AFP supports balanced regulations. However, the proposed new regulations, as currently drafted, would fail to maintain that balance by restricting already existing SALT credits, leading to decreased charitable giving that would affect the lives of many people who depend on philanthropic services. Therefore, we urge you to either rescind the proposed regulations or narrowly tailor them to preserve the charitable giving spurred by long-standing SALT credits dedicated to promoting charitable and philanthropic organizations.