Are you a philanthropist who indulges in giving charitable contributions to the state? Or are you planning to start doing so? Well, contributions for the welfare of the society will now unbox some uncalled-for returns apart from the tax benefits that accompany them.
If you are registered under a state or local tax credit program and wish to make the most of your tax returns, by reducing your tax implications and retaining the most of your hard earned dollars, then the following article is a must-read to get some exciting updates.
The big news
The final regulations on charitable contributions and state and local credits have been finalized by the Treasury and the IRS by coming up with an even more simplified procedure. Previously, individuals making charitable contribution to the state used to get local or state credits as a return on the amount contributed as a charity. The new regulation requires taxpayers to reduce the amount of charitable contribution deductions with the state or local tax credits they receive or expect to receive after making such contribution.
For example: If a state provides 60% credit in accordance with the state credit program and your charitable contribution amounts to $1000. Then, the amount of state credit to be received as tax credit refund would be $600. As per the new regulation, you are required to reduce the amount of state credit to be received by you before making such a contribution. Hence, instead of paying $1000, and receiving back $600 as state credit, you pay $400 as contribution and show the deducted amount as state or local tax payments while filing your tax returns.
The new regulation is effective from 12th August 2019
The new regulation applied to the contributions made after 27th August 2018 and will be considered effective from 12th August 2019. Under the new rule, if you are a taxpayer who wishes to make a charitable contribution to an entity eligible to receive tax-free contributions, then you shall make the charity after reducing the amount of any state or local tax credit receivable by you on such a charitable contribution. The new regulations will be applicable to you if making such charity as a trust or decedent’s estate, to determine the amount of your charitable contribution deductions.
Know about a few exceptions
Dollar-for-dollar state tax deduction
Dollar-for-dollar state tax deduction is an exception to this new regulation. If you receive a state tax deduction of $1000 for a charitable contribution of the same value, then you are not required to reduce the expected amount of state or local tax credit receivable by you in return for such charitable contribution.
Eligible tax credit is equal to or less than 15%
If you are expecting to receive a local or state credit of 15% or less, then your case will be treated as an exception to the new regulation and you would not be required to reduce the amount of such credit from your federal charitable contribution.
A safe harbour for taxpayers who have already filed their returns
If you have already filed your returns and itemized charitable deductions, then there are chances that the new regulation disallows a charitable contributions deduction as a state or local tax (SALT) for federal income tax purposes. However, you needn’t fret about this., Eligible taxpayers can use the safe harbour to determine their local or state tax deduction for their tax year 2018 return and file amended returns.
File an amended return
Use the Form 1040-X to file an amended return and try your chances to claim a higher SALT deduction, if you have not already claimed the threshold amount of $10,000 and $5000 if you are married and filed separate returns.
Wrapping up, the new regulation has multi-fold benefits for the taxpayers to keep the most of their income to themselves and increase their tax benefits.
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