The new tax law has a lot of stuff in it, some of it very complex and yet to be fully fleshed out. One provision that has received much press and dialog is the cap on state and local tax (SALT) deductions for individuals at $10,000. This provisions has elicited much wailing and gnashing of teeth in California and New York, where extremely high state income taxes as well as property taxes are the norm.
To counter the perceived impact, the wise leaders in Sacramento have proposed a law (SB 227) that will allow CA residents the ability to pay into a “CA Excellence Fund” to be distributed amongst various state agencies. Taxpayers would take a Federal tax credit AND a donation deduction for the amount. If this were to stick you could pay $100 into this fund and receive $137 in tax reductions. What a deal!
What they aren’t telling you is that IRS could disallow said credit and deductions for several reasons, such as receiving a “quid pro quo” benefit for the charitable donation, or on grounds the transaction is a tax sham solely to defraud the federal government and lacking economic substance or donative intent. Alternatively, Congress could simply pass a law making tax credit arrangements for charitable purposes illegal.
If you were to enter into one of these arrangements and a year or two later find yourself in front of an IRS examiner assessing you back taxes, penalties and interest, do you really think that our CA politicians will be anywhere around to help then? When the credits and deductions are disallowed do you think the state will cheerfully refund your money? If so, I have a bridge out in the desert I’ll sell cheap.
This issue really isn’t the big deal that many make out of it. SALT deductions have been reduced or denied to the middle class for years due to the effect of Alternative Minimum Tax (AMT). If you have paid AMT on your taxes, you probably weren’t getting the benefit of SALT deductions anyway, so the loss of these deductions, offset by the lowering of rates, may not be felt much by many people.