By Jared Walczak
New Jersey, New York, and Connecticut are suing to prevent the federal government from cracking down on a tax avoidance scheme that would have been written off as frivolous if it weren’t being enabled by three state governments. Their efforts are likely to prove a waste of taxpayer money.
The state and local tax (SALT) deduction is now capped. The income tax deduction for charitable contributions is not. Inevitably, someone had a bright idea: what if, instead of paying taxes, high earners could make a “charitable contribution” to their state government? Not actual charity, mind you. But what if they could take the taxes they had to pay to state and local government and wrap them up with a bow that reads “charitable contribution”? They say charity begins at home, but it usually doesn’t remain there. Real charity benefits someone other than the giver.
Unsurprisingly, the federal government took a dim view of state governments’ attempts to game the federal tax code, promulgating regulations that draw on longstanding, court-tested principles about what does and doesn’t constitute a charitable contribution for purposes of claiming the federal tax deduction.
There’s a great deal of complexity and nuance, but the simple version is this: charity is unrequited. A contribution that gets you something in return isn’t genuine charity; it’s just a payment by another name. The IRS applied this quid pro quo doctrine to the states’ schemes, whereby these pseudo-contributions offset income tax liability, concluding that the only portion of such an incentivized contribution that is genuinely charitable — and thus eligible for the deduction — is the portion above and beyond the value of the tax benefit.
Read the full op-ed here.