IRS issues final regulations on donations with tax credit benefits

By notice IR-2019-109 on June 11, 2019 the U.S. Department of the Treasury and the Internal Revenue Service issued final regulations that require taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return. In a notice also issued the IRS stated that taxpayers may treat payments they make in exchange for these credits as state or local tax payments. This allows some taxpayers to deduct certain of the payments as taxes.   
Treasury Decision 9864, available  in the Federal Register, finalizes proposed regulations published August 27, 2018, that were designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The Treasury Department and the IRS issued the Treasury Decision after carefully reviewing the more than 7,700 written comments received during the comment period and 25 comments made at the November 2018 public hearing.
The final regulations, which apply to contributions made after August 27, 2018, and are effective on August 12, 2019, largely adopt the rules in the proposed regulations. Under the final regulations, a taxpayer making payments to an entity eligible to receive tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return. 
The effect of these final regulations on Pennsylvania EITC donors federal donation deduction depend on he donors individual situation.

1. Donors that uses the standard deduction of $24,400 for 2019 (single $12,200) which includes approximately 93% of taxpayers will have no change in their taxes.  Donors will receive a 90% PA tax credit in return for an EITC donation.  
2. Donors with under $10,000 in state and local taxes and itemize will receive a 90% PA tax credit in return for an EITC donation.  In addition donors will receive an additional 10% donation deduction and their full state tax deduction including any state taxes that may be refunded.  
3. Donors with over $10,000 in state and local taxes who itemize will receive a 90% PA tax credit in return for an EITC donation.  In addition donors will receive an additional 10% donation deduction. If the donor receives a Pennsylvania refund and receives a 1099G in the year following the donation they can treat this refund as non taxable because the donor got no tax benefit from the payment of state taxes.

The benefit of participating in Pennsylvania EITC donations are estimated as follows:

1. Example of $10,000 donation would be $9000 PA tax credit benefit.  The donor could pay $9,000 less in Pa estimated taxes or if all income is wage withholding only the donor will receive a $9,000 Pa tax refund because of paying twice with Pa wage withholding and a Pa EITC tax credit donation.
2. Example of $10,000 donation would be $9,000 PA tax credit and $1,000 donation deduction benefit and an undefined additional  state tax deduction up to the $10,000 maximum allowed ($4,000 in this example).   The donor would be at least in the 24% federal tax bracket so the benefit could  be $10,200 ($9,000 tax credit and $1,200 additional federal tax refund ($1,000 donation plus $4,000 of extra state tax X 24%)).
3. Example of $10,000 donation would be $9000 PA tax credit and $1,000 donation deduction benefit.  The donor could be in the 37%  federal tax bracket so the benefit would be $9,370 ($9,000 tax credit and $370 additional federal tax refund).

The changes in federal tax benefit of participating in Pennsylvania EITC donations don’t impact most donors.  Our special purpose entities (SPE) will issue 2019 K-1s with 10% federal donation deductions and a disclosure that if tax credits are unused or state and local taxes are less than $10,000 additional deductions may be available.
As always we encourage all donors to participate in EITC as an extremely tax efficient way to redirect state taxes to a local Pennsylvania K-12 or preschool tuition based school of the donors choice.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.