Final regulations have been issued to guide taxpayers on the treatment of charitable contributions that qualify for state credit programs. In June, the US Treasury and the IRS issued final regulations that require taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive for the donation. These final regulations apply to all charitable contributions made after August 27, 2018. Any charitable contribution deduction on the federal return must be reduced by the amount of state or local credit that the taxpayer receives or expects to receive as a direct result of their contribution.
For example, if a taxpayer donates $1,000 to a charity and receives a state tax credit worth 65% of the donation, then the taxpayer will be able to report a $350 charitable contribution deduction on their tax return. The remaining $650 would then be treated as a state and local tax payment that is subject to the $10,000 deduction limit.
The regulations provide an exception for tax credits that are no more than 15% of the contribution. For example, if a taxpayer donates $1,000 and receives a state tax credit worth $150 for the donation, then the taxpayer may still deduct the full $1,000 charitable contribution.
In Virginia, the final regulations will apply to Neighborhood Assistance Program credits and Education Improvement Scholarship credits, which are two credit programs that grant a 65% state tax credit for eligible donations.
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