Substance over form.  It’s a concept that the IRS uses to define what is really taking place when it comes to a transaction.

In previous episodes, I’ve discussed the new limitations for the State and Local Tax deductions that were implemented under tax reform.  With the $10,000 cap limitation on state and local tax deductions, high tax states begin looking at ways to work around the caps that were implemented.

States like New York, Connecticut, New Jersey begin implementing a strategy where part of the taxes their residents were paying in state and local taxes would be categorized as a charitable contribution to the state.

Unlike the caps on state and local taxes, there is no cap on the amount of money you can give to a charitable contribution.  There are some limitations on charitable contribution based on the taxpayer’s AGI.  However, what portion of the charitable contribution isn’t used in the contribution year can be carried forward five years.

This week the IRS and the Treasury Department released the regulations for states using this charitable contribution method to collect taxes.

Under the regulations, if a taxpayer made a charitable contribution to the state for $50,000 and the state issued a $35,000 tax credit for the portion of the contribution that would have been categorized as state income, then your contribution to the state is $15,000—not the $35.000.

The regulations that the IRS and U.S. Treasury Dept announced is similar to giving to a non-profit organization where the donor gave $1,500 for a painting worth $1,000.  The difference between the value of the painting and the amount the donor gave and can deduct as a charitable contribution is $500.

These regulations for the state charitable contributions for the state and local tax $10,000 caps took effect on August 27, 2018.

The IRS and U.S. Treasury Department still have time to make changes to these state and local tax rules and regulations before the end of the year.    Taxpayers should be aware of the tax changes that took effect under the Tax Cuts and Jobs Acts of 2017 which may affect their taxes that begin on January 1, 2018.