New York’s Response to Federal Tax Reform: Charitable Contributions Credit

Overview


In an effort to mitigate the effects of the elimination of the individual SALT deduction as part of federal tax reform, New York has enacted a charitable contribution regime under which individuals may contribute to state or locally established charitable funds and receive a tax credit against their New York State income taxes or real estate property taxes. The hope is that taxpayers could claim the charitable contribution deduction federally in lieu of the foregone deduction for New York State and locality taxes paid, but many commentators believe this tax credit structure is legally suspect.

In Depth


New York is the first state to pass legislation aimed at mitigating the effects of the elimination of the state and local tax deduction for individuals as part of federal tax reform. The changes came in two parts: (1) enactment of a charitable contribution regime, discussed in this article, and (2) enactment of an optional payroll tax, discussed in a separate On the Subject.

The idea behind the charitable contribution regime is simple: individuals may contribute to state or locally established charitable funds and receive a tax credit against their New York State income taxes or real estate property taxes. The hope is that taxpayers could claim the charitable contribution deduction federally in lieu of the foregone deduction for New York State and locality taxes paid. However, many commentators are concerned that the law will not pass muster federally because the New York law appears to be a deliberate attempt to circumvent the impact of the federal tax changes, and contributions may be viewed as indirect payments of taxes. For more information, see McDermott’s On the SubjectCharitable Funds and the Disallowance of Federal Income Tax Deductions for State and Local Taxes.”

Ultimately, it will be interesting to see if or how the Internal Revenue Service (IRS) deals with the new New York Law.

Overview

This law provides individuals with credits against their New York State personal income tax liability equal to 85 percent of the donations they make to certain charitable organizations.

The law also authorizes localities (such as New York City) to establish similar charitable funds and to provide contributing individuals with a credit equal to 95 percent of the donation to use to offset the individual’s real property tax liability.

Eligible Donations

The State is authorized to form a charitable gift trust fund with two accounts: the health care charitable account and the elementary and secondary educational charitable account. The amounts that can be donated to these funds and qualify for the credit are unlimited.

In addition, qualified donations to Health Research, Inc.; the SUNY Impact Foundation; and the CUNY Research Foundation are authorized, although the amount of total contributions to each of these organizations may not exceed $10 million. Because of the $10 million limitation, taxpayers will need to apply to make creditable donations to these entities.

Personal Income Tax Credit Timing Issues

Credit would apply for the tax year after the year in which the contribution is paid (i.e., a 2019 contribution would affect the employee’s 2020 New York State income tax credit).

The anticipated federal benefit would relate to the tax year in which the contribution is paid (i.e., a 2019 contribution would affect the employee’s 2019 federal income tax return).

Personal Income Tax Credit Documentation

The law establishes a mechanism to provide each donor with a certificate/statement of his or her payment, which certificate can then be used to support taking the credit on the individual’s tax return.

Real Property Tax Timing Provision and Mechanism

Credits would be granted for payments made during the 12-month period within which real property taxes are due without interest or penalties (this period would be determined by local law).

The taxpayer must present a certificate of contribution to the local authority before the last day on which property tax payments are due in order to receive a credit for taxes paid or due during that period. If the taxpayer presents the certificate late, he or she may receive a refund of property taxes paid.

The anticipated federal benefit would relate to the tax year in which the contribution is paid (i.e., a 2019 contribution would affect the employee’s 2019 federal income tax return).

Mitigation Provision

The law requires the State to establish an online system for taxpayers to claim reimbursement for any interest paid to the IRS if the IRS disallows a deduction for the contribution, although the law does not say that taxpayers are entitled to such reimbursement. Taxpayers are required to request reimbursement via the online system within 60 days of making their payments of interest. Taxpayers may claim reimbursement for tax years 2019–2021 only.

Commentary

Many practitioners believe this tax credit structure is legally suspect.