Just Taxes Blog by ITEP

ITEP Resources on the Upcoming SALT Workaround Regulations

ITEP Resources on the Upcoming SALT Workaround Regulations

August 9, 2018

Carl Davis
Carl Davis
Research Director

The IRS is on the verge of proposing regulations that would make it more difficult for taxpayers to circumvent the new $10,000 cap on deductions for state and local taxes (SALT). The regulations, which are undergoing a final review from the President’s Office of Management and Budget (OMB), are being crafted in response to large charitable donation tax credits enacted in New York and elsewhere. In essence, the credits allow taxpayers to make so-called “charitable donations” in lieu of paying state or local taxes. This relabeling is hugely beneficial to taxpayers on their federal returns since the cap on state and local tax deductions (a flat $10,000) is much lower than the cap on charitable giving deductions (60 percent of income). Put another way, the new federal law treats philanthropists much more generously than state and local taxpayers, and so the latter are predictably scrambling to look more like the former.

It’s a safe bet that the IRS will try to crack down on the newest policies in states like New York that provide tax credits to people who donate to public education and other public services. But it remains to be seen whether the regulations will be written broadly enough to shut down a longer-running tax shelter that private schools and their supporters are using to fund vouchers for attendance at private and religious K-12 schools. Already this year, private school “donors” in Arizona and Alabama have leapt at the chance to turn a profit by claiming state tax credits and federal charitable deductions that are larger than the amounts they donate. And national groups promoting private schools, such as EdChoice and the American Federation for Children, are urging the IRS to leave this profitable shelter intact.

ITEP will be taking a deep dive into the regulations as soon as they are made public.  Until then, here are some resources for getting up to speed on this issue:

  • SALT/Charitable Workaround Credits Require a Broad Fix, Not a Narrow One
    There are good reasons for the IRS to reconsider its treatment of state charitable tax credits. A taxpayer who makes a so-called “charitable donation,” only to later be reimbursed in full with a state tax credit, is not engaging in genuine “charity” according to any commonsense definition of that word. But if the IRS is going to overhaul its treatment of state charitable credits, it needs to do so broadly. This report explains that a regulation treating some state tax credits differently from others would be unfair, arbitrary, and ultimately ineffective as well.
  • Tax Bill Would Increase Abuse of Charitable Giving Deduction, with Private K-12 Schools as the Biggest Winners
    The SALT deduction cap included in last year’s federal tax overhaul indirectly expanded a long-running loophole benefiting private K-12 schools. This report, written shortly before the bill’s final enactment but reflecting all of the relevant details of the new law, calculates the specific levels of profit that taxpayers in various states can reap by making so-called “donations” to private schools. In Alabama, for instance, a $50,000 donation can yield up to $67,575 in combined state and local tax cuts. In other words, a high-income taxpayer can collect $17,575 in profit every year, at the public’s expense, by agreeing to contribute money to fund private and religious school vouchers.
  • The Other SALT Cap Workaround: Accountants Steer Clients Toward Private K-12 Voucher Tax Credits
    The profit incentive is quickly becoming a central feature of private schools’ efforts to raise money in some states. This report catalogues numerous examples of private schools, voucher organizations, tax accountants, and financial advisors telling their clients and prospective donors that “giving” is actually a way to “make money” by “bypassing” the federal government’s $10,000 cap on SALT deductions.
  • How States Turn K-12 Scholarships Into Money-Laundering Schemes
    This article offers a brief overview of the idea behind private school voucher credits: “Rather than include line-items in state budgets for spending on school vouchers, lawmakers ask taxpayers to undertake such spending on the state’s behalf, in return for a generous tax giveaway.” Sometimes states set up these roundabout systems because of a state constitutional ban on direct public funding of private and religious education. Other times, lawmakers have judged that labeling their voucher programs as tax credits simply makes them more politically palatable. Regardless of why these policies ended up on the books, the result has been a lucrative tax shelter that private schools have harnessed as a fundraising tool, and that their allies at the national level are fighting to preserve in the face of potential new regulations.