Tax experts have identified a potential workaround to the new limitation Republicans are placing on the state and local tax deduction, and say states could set up charities to fund state services that could receive federally deductible gifts.
The GOP tax overhaul passed by Congress this week sets a limit on the federal deduction for state and local taxes, or SALT. Under the bill, taxpayers can only deduct up to $10,000 in state income and property taxes from their federal taxable income.
But it appears that state and local governments could help residents circumvent that limit by setting up charities to fund programs. Here’s how it would work:
Taxpayers suffering tax hikes due to the SALT limitation could donate to the charities and, in return, receive a dollar-for-dollar tax credit applicable to their state or local tax bill. Then, they could deduct up to 37 percent of that the “donation” from their federal taxable income through the charitable deduction, which was left uncapped in the tax overhaul. The deduction level would depend on their tax bracket.
In this way, states could create tax credits for donations to, for instance, their university systems by giving donors back 100 percent of the gift in the form of state income tax breaks. From the state’s perspective, it would still be getting revenue to fund services. But from the taxpayers’ perspective, they would be able to write off a portion of that donation from their federal taxes, which they couldn’t do if the university funding were collected in the form of a tax.
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GOP limit on state, local tax deductions could be circumvented with charities https://t.co/0Lh5vJMZ9G pic.twitter.com/iJoTJFv1uo
— Washington Examiner (@dcexaminer) December 21, 2017
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