Failed Charity: Taking State Tax Benefits into Account for Purposes of the Charitable Deduction
20 Pages Posted: 7 May 2018
Date Written: April 30, 2018
The Tax Cuts and Jobs Act (TCJA) substantially limited the ability of individuals to deduct state and local taxes (SALT) on their federal income tax returns. Some states are advancing schemes (CILOTs) to allow taxpayers a state tax credit for contributions to a 501(c)(3) organization controlled by the state. The issue is whether CILOTs are deductible as charitable contributions on federal returns. Under a general rule of prior law – the full deduction rule – state tax benefits were ignored for purposes of the charitable deduction. If the full deduction rule is applied to CILOTs, then the SALT limitation can successfully be avoided. This article explains that after the TCJA, state tax benefits are more valuable and it no longer makes sense to ignore them for purposes of determining whether a taxpayer has made a charitable contribution. To allow a charitable deduction for payments that make a taxpayer better off would undermine a fundamental purpose of the charitable deduction: that it is meant to encourage personal sacrifice, not tax avoidance. Thus, CILOTs likely fail as charitable contributions. Further, by changing the economics of state tax benefits, Congress inadvertently has called into question the deductibility of a variety of other payments that trigger state tax benefits and that previously have been deducted as charitable contributions.
Keywords: salt, charitable deduction, full deduction rule, state and local tax deduction, contribution, substantial return benefit, donative intent
JEL Classification: H1, H20, H24, H26, H27, H50, H70, H71, K34
Suggested Citation: Suggested Citation