IRS Deductions for State and Local Taxes and Charitable Donations: Recent Guidance

The Internal Revenue Service (IRS) advised taxpayers this month to exercise care in claiming tax deductions for (1) state and local taxes, and (2) charitable donations.  The guidance applies to 2018 and future tax years.

State and Local Taxes

On May 23, 2018, the IRS published Notice 2018-54, titled: “Guidance on Certain Payments Made in Exchange for State and Local Tax Credits.”  The Tax Cuts and Jobs Act limited the aggregate amount of the deduction for state and local taxes under section 164 of the Internal Revenue Code to $10,000 (reduced to $5,000 for a married individual filing a separate return).  Some state legislatures, including New York and New Jersey, have proposed or adopted laws that would enable taxpayers to donate to a charity controlled or designated by the state government in exchange for a credit on state and local taxes.  The IRS warns taxpayers to be “mindful that federal law controls the proper characterization of payments for federal income tax purposes.”  Regulations are expected to issue later this year.  The New York Times reported that the state governments might challenge the upcoming regulations in court.

Charitable Donations

Donations of cash and other property to charitable organizations are tax-deductible as an itemized deduction under section 170 of the Internal Revenue Code.  The IRS published Rev. Proc. 2018-32 with an effective date of May 16, 2018, to “provide guidance to grantors and contributors to tax-exempt organizations on deductibility and reliance issues.”  Taxpayers can search the new IRS database, Tax Exempt Organization Search (TEOS), to obtain current verification that an organization is eligible to receive tax-deductible charitable contributions.  Previously, taxpayers had to look up the organization’s name in IRS Publication 78.  Third-party sites such as GuideStar continue to provide data on U.S. charities for the benefit of donors and the general public.

I recommend that a prospective donor should check both the IRS database and GuideStar before making a large charitable donation to an unfamiliar organization.

For all cash donations of $250 or more, the donor should keep a contemporaneous receipt showing the amount of the donation, and should receive and preserve a letter from the organization stating that “No goods or services were provided” in exchange for the donation.  See IRS Publication 1771, under the section heading “Written Acknowledgment.”

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