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U.S. Treasury Department/IRS Propose Regulations on State and Local Government Tax Credits; Arizona Tax Credit Programs Impacted

Arizona Tax Credit ProgramThe U.S. Treasury Department and the Internal Revenue Service released draft regulations that change how the federal government will treat donations to charitable organizations that generate state or local government tax credits. These proposed tax regulations are reportedly targeting high tax states that are looking to convert some state and local tax payments (which are capped under the 2017 Federal tax law) into uncapped charitable deductions. As written, these regulations would also apply to many programs in Arizona and other states that currently provide a state or local tax credit when a taxpayer makes a donation to certain charitable organizations.

The proposal would require taxpayers to deduct the value of a state tax credit from the federal charitable deduction. As a result, federal charitable deductions will no longer be allowed if you get a credit against your state tax for the donation.

The proposed rule has a stated effective date of Monday, August 27. After this date, donations to credit eligible charitable organizations will likely no longer receive a federal charitable deduction. 

If you are most likely going to itemize your deductions in 2018 and you plan on donating to credit eligible charitable organizations this year, then you should do so this weekend before the tax treatment of the donations possibly change. 

As a reference for Arizona residents, Arizona currently offers five tax credits:

  1. Qualifying Charitable Organization ($400 Single / $800 MFJ)
  2. Qualifying Foster Care Charitable Organization ($500 Single / $1,000 MFJ)
  3. Public Schools ($200 Single / $400 MFJ)
  4. Private School Tuition ($1,107 Single / $2,213 MFJ)
  5. Military Relief Fund ($200 Single / $400 MFJ)

Additional information on these credits and qualifying organizations can be found at https://azdor.gov/tax-credits. Please contact your Versant Wealth Counselor with any additional questions.

Additional reading

Nonprofits Respond to Release of Proposed Rules on SALT Workarounds, National Council of Nonprofits, news release, August 23, 2018

Treasury Issues Proposed Rule on Charitable Contributions and State and Local Tax Credits, Treasury Department news release, August 23, 2018.

Govt acts to stop high-tax states from skirting $10K cap, Associated Press coverage, August 24, 2018.

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