Important analysis and perspective regarding the impact of proposed IRS regulations on taxpayers who contribute to state tax credit programs

Although, under proposed IRS regulations, individual donors to these programs may no longer take a federal charitable income tax deduction, in the majority of cases, there is no financial cost for contributing to the programs in lieu of paying Georgia income tax liabilities. Although taxpayers who desire to support pre-k-12 educational opportunities for families instead of paying their Georgia income taxes may do so without cost, unlike contributions made on or before August 27, 2018, there is presently no financial benefit in doing so.

We are still waiting for final Treasury regulations to be issued addressing the tax treatment of contributions to charities for which the donors receive state or local tax credits. It is possible that the final rules will permit a federal deduction of contributions to state income tax credit programs that were established prior to the enactment of the SALT cap. In the meantime, Georgia taxpayers who are deciding whether to support pre-k-12 educational opportunities for families should remember that, though they will not receive an extra financial benefit for contributing, except in limited circumstances, their net after-tax cash outlay will be the same whether they donate or make state tax payments to satisfy their Georgia tax liabilities.

Update: Tax Guidance Relieves Some Private School Choice Supporters
C Corporations will be able to continue making fully tax-deductible donations to private school choice programs under guidance issued by the Treasury Department.

On August 23, 2018, the U.S. Treasury Department published proposed regulations that would require taxpayers who contribute to tax-exempt charitable entities, such as Georgia GOAL, and receive a state income tax credit, to reduce the amount of their contribution for federal income tax purposes by the amount of the state income tax credit. 

During the 45-day comment period, during which taxpayers and other affected parties were permitted to comment on the proposed regulations, GOAL and members of the school choice community nationwide informed the Treasury Department and lawmakers about the importance of revising the proposed regulations to preserve the federal tax treatment of long-established, policy-oriented state income tax credit programs. 

There has been no action taken by the IRS related to their proposed regulations. Although we are cautiously optimistic that the IRS will positively respond to the many taxpayer and lawmaker comments encouraging the IRS to revise the proposed SALT regulations to preserve the federal deductibility of charitable contributions to student scholarship organizations, the IRS has no mandatory deadline by which they must revise or finalize the proposed regulations. Georgia GOAL and Senator Johnny Isakson have encouraged the IRS to adopt a “facts and circumstances” test that will preserve the federal charitable deduction with respect to state income tax programs that were enacted to promote a critical public policy objectives that lawmakers determined were in need of public philanthropic support, such as K-12 student scholarships. 

If, in the next few weeks, the IRS does not favorably revise or withdraw its proposed regulations, it is possible that the current “lame duck” session U.S. Congress could enact a legislative solution, which would “grandfather in” programs like Georgia GOAL.

In either case, we are closely monitoring IRS regulatory and Congressional legislative developments and will inform you accordingly.

While we remain hopeful that the IRS will withdraw or revise their proposed regulations, keep in mind that even with the proposed regulations, the federal tax impact for most contributors will simply be a ‘wash’ – with no benefit or cost. (See below for further details.*)

We encourage you to continue to support this program’s mission and to apply for your 2019 GOAL tax credit!

  1. For all, there will still be a 100% state income tax credit!
  2. For most, there will be no federal tax impact whatsoever.
  3. If you have questions about the federal impact given their specific circumstances, they may contact their tax preparer.

*The details for the different groups of taxpayers are summarized below:

Taxpayers taking the Standard Deduction – No Cost   

Note that in 2018, more taxpayers will be taking the standard deduction, since a married couple must have at least $24,000 in deductions in order to itemize them on their return, and a single taxpayer must have $12,000 in deductions in order to itemize. This group may contribute to GOAL without any fiscal impact (a complete “wash”)

Taxpayers who Itemize and whose SALT deduction is limited – No Cost  

For taxpayers who itemize and owe more than $10,000 in state and local taxes, they may contribute any excess over their $10,000 to GOAL without any fiscal impact (a complete “wash”)

Taxpayers who Itemize and whose SALT deduction is NOT limited – Would pay more in federal income taxes by contributing to GOAL

For taxpayers who itemize and owe $10,000 or less in state and local taxes, they will lose a federal itemized deduction (as the proposed regs are currently written), since the IRS has specified that amounts contributed in exchange for a state tax credit are not deductible

We are cautiously optimistic that the IRS will remove this provision (which was likely a mistake) when they issue their final regulations.