An Article by:
Scott P. Borsack
Late in 2017 President Trump signed legislation which, among other things, increased the standard deduction and reduced the amount which taxpayers could deduct on account of the payment of state and local taxes. State governments in the northeastern United States, among them New York and New Jersey at first complained about the limitations. They then began to search for work-arounds allowing residents to claim deductions for funds delivered to state and local governments. In May of this year, Governor Phil Murphy signed legislation allowing municipalities to create charitable alternatives to local property taxes. Enabling regulations were required to guide municipalities. Those regulations were published by the Director of Local Government Services on September 25, 2018 and now it’s up to local municipalities to take action to provide a means for its residents to seek a replacement for lost real estate tax deductions.
Under the legislation enacted by the State of New Jersey recently, 90% of the contribution which a taxpayer makes to a charitable fund established by a municipality can be credited to the property tax obligation of the property owner. A municipality, for example, may establish separate funds for public safety, capital improvement, public works, public health, social services, recreation, open space and public library just to name a few of the potential beneficiaries of locally established funds. These funds can be established by local ordinance and a single fund can be established for multiple purposes. Where a municipality has separate funds, a taxpayer will have to make contributions to each fund. School districts and county governments can establish funds as well.
Taxpayers will be permitted to contribute any amount, but no more than 90% of donations by a property owner can be credited toward the property owner’s real estate tax obligation. So a contribution of $10,000 for a property owner with property taxes of $11,000 would yield a credit to property taxes of only $9,000 (90% of $10,000). The property owner would have to write a separate check to the municipality of $2,000 to cover the uncredited portion of the contribution. Apparently, the Internal Revenue Service has followed the activities in Trenton and Albany and other state capitols and has proposed regulations which would limit the amount of the charitable contribution deduction. Under the federal regulation, a charitable contribution deduction is not permitted where the credit afforded to state real estate taxes is more than 15% of the amount contributed to a state or localcharitable fund intended to supplant local property taxes. So in New Jersey where the maximum amount of the credit is 90% of the contribution to a local charitable fund, the new federal regulation would limit the amount of the charitable contribution deduction to the lesser of $1,000 or 15% of the amount of the contribution.
New Jersey’s Attorney General, as well as the Attorneys General of other states whose residents have been adversely affected by the change in the so called SALT deduction, have threatened to challenge the propriety of the federal limitations, both statutory and administrative. The impact of these disputes is difficult to predict and likely won’t be known for several years.
Since the Director of Local Government Services has posted a model ordinance on its website, and municipalities have to enact their ordinances before the end of the year to provide some benefit to taxpayers, watch for action on these concepts in your home town in the coming weeks. We will continue to monitor these developments closely.
Scott Borsack is the Chair of the Business Department and has over 30 years of experience representing clients in a variety of transactional matters. He is routinely called upon to structure transactions to minimize the burden of federal and state taxes. He also counsels clients on minimizing the tax burden when passing wealth from one generation to the next.
For more information on tax law, please contact Scott Borsack of Szaferman, Lakind, Blumstein and Blader, P.C. at firstname.lastname@example.org or (609) 275-0400.