New Jersey residents might be able to avoid federal deduction limits on property taxes by converting them to a charitable contribution under a proposal the state Senate approved Feb. 26.
S.B. 1893 would permit municipalities, counties, or school districts to establish charitable funds and allow donors to receive property tax credits in exchange for donations. The proposal is similar to proposals in other states, such as California and New York, that aim to use charitable contributions as a way around the state and local tax deduction cap included in the new federal tax law.
Under the new law, taxpayers who itemize deductions on their federal return may deduct up to $10,000 in state and local sales, individual income, and property taxes (SALT deduction). Previously the SALT deduction was unlimited.
Sponsored by Senate President Stephen Sweeney (D) and Deputy Majority Leader Sen. Paul Sarlo (D), the measure passed the Senate by a vote of 28-9.
The proposal is one of many legislative fixes that New Jersey is considering to counteract heavy tax burdens resulting from the 2017 federal tax act ( Pub. L. No. 115-97). New Jersey residents pay high state and local taxes as well as some of the highest property taxes in the country.
The charitable deduction proposal has support from Gov. Phil Murphy (D), who earlier this month told a gathering of mayors that shifting property tax payments to a charitable contribution system “provides residents with significant deductibility from their federal income taxes.”
Under the proposal, the local government unit would need to pass an ordinance or resolution to establish the fund, set an annual donation cap, and set an annual limit on tax credit funding that could be made available. The limit on tax credit funding would equal 90 percent of the annual donation cap, according to a Feb. 15 statement accompanying the bill.
However, Treasury Secretary Steven Mnuchin has cast doubt on such workarounds and has threatened to audit taxpayers who use them. IRS Publication 526 says that taxpayers can’t deduct as a charitable contribution any payment for which they receive a benefit in return.
Several Republican Senators who voted against the bill expressed concerns that the IRS wouldn’t accept the workaround.
“This deduction is worth a hundred million dollars in tax revenue. There’s no way the federal government is going to look away,” said Sen. Joseph Pennacchio (R). “I don’t want to put my taxpayers at risk.”
Sen. Steven V. Oroho (R) worried that “we’re going to give our residents a false sense of security.”
Sarlo said there are 33 other states that have similar programs. “If the IRS rules that we cannot proceed, then I would love to be at the table when we challenge them in court,” he said during debate on the bill.