Not so fast, taxpayers! Proceed with caution, warns the IRS, after New York and New Jersey approved workarounds involving charitable organizations.
Earlier this year New Jersey Governor Phil Murphy and New York Governor Andrew Cuomo signed new legislations in their respective states allowing local governments to set up charitable organizations that can accept property tax payments. Homeowners can declare those “donations” as gifts to offset federal taxable income.
The methods were designed to circumvent new federal limits on deductions for state and local taxes, but not everyone is a fan. In fact, the government is of a different opinion. Officials are seeing them as possible tax evasion schemes. Kevin Brady gives thumbs down and Treasury Secretary Steven Mnuchin called the proposals “ridiculous.”
Part of the issue is that states such as New Jersey, New York and Connecticut characteristically have high property taxes and the tax overhaul created a cap of $10,000—peanuts in comparison.
The Internal Revenue Service has also weighed in, reminding taxpayers to be mindful that federal law controls “the proper characterization of payments for federal income tax purposes.” The Treasury Department and IRS have stepped up, setting parameters for homeowners who intend to declare their property taxes as charitable deductions.
Other voices are being heard on the issue. Jared Walczak, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, called the new cap “legally dubious.” He says he would not be surprised to see litigation. The chairman of law firm Hodgson Russ in New York, Mark Klein, expressed “grave concerns” that taxpayers who voluntarily give to these state and local charities could be subject to taxes and penalties by the IRS.
Our guess is this is not the end of the story. Stay tuned…