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IRS Clarifies Tax Treatment of State and Local Tax Refunds under new SALT Deduction Limit by Karen A. Lake, CPA

Posted on April 22, 2019 by Karen Lake

The IRS recently issued guidance to help taxpayers in high-tax states understand how the new tax law’s $10,000 annual limit on deductions for state and local taxes (SALT), and property and real estate taxes affects the tax treatment of SALT refunds they receive beginning in tax year 2019.

In general, taxpayers may exclude from their taxable income any dollar amount they receive as a refund for SALT paid in a prior year in which they claimed a standard deduction, which for 2018 is $12,000 for single filers or $24,000 for married couples filing jointly. This is not the case when taxpayers itemize their deductions. Rather, when itemizers receive a refund for all or a portion of the state and local taxes they paid in a previous year, they must report the recovered amount the following year on their federal returns as taxable income, to the extent the taxpayer received a tax benefit from the deduction in the prior year. The legal theory behind this rule is that taxpayers who receive a tax benefit in one year (in the form of a SALT deduction) should not be permitted to also benefit from a refund they receive for that tax benefit in a future year.

Taxpayers in high-tax states, such as New York, New Jersey, Connecticut and California, who paid state and local taxes, property taxes and real estate taxes in excess of the $10,000 cap in 2018 and who subsequently receive a SALT refund in 2019 will need to determine how much of that refunded amount they must include as taxable income when they file their 2019 tax returns in 2020. After all, if taxpayers received a tax benefit from deducting state or local taxes in 2018, they may not receive a second benefit in the form of a tax refund in 2019. Instead, the taxpayer who recovers any portion of state or local state or local tax, including state or local income tax and state or local real or personal property tax, must include in gross income for 2019 the lessor of 1) the difference between the taxpayer’s total itemized deductions taken in the prior year and the amount of itemized deductions the taxpayer would have taken in the prior year had the taxpayer paid the proper amount of state and local tax or (2) the difference between the taxpayer’s itemized deductions taken in the prior year and the standard deduction amount for the prior year, if the taxpayer was not precluded from taking the standard deduction in the prior year.

The IRS’s revenue ruling illustrates the recovery of tax benefits with four examples, including one in which a taxpayer paid local real property taxes of $4,250 and state income taxes of $6,000 in 2018. Due to the SALT cap, the taxpayer could deduct on his 2018 federal income tax return only $10,000 of the total $10,250 he paid in state and local taxes. Including other allowable itemized deductions, the taxpayer claimed a total of $12,500 in itemized deductions in 2018. In 2019, the taxpayer received a $1,000 state income tax refund due to an overpayment of state income taxes in 2018. Had the taxpayer paid only the proper amount of state income tax in 2018 ($5,000 instead of $6,000) his state and local tax deduction would have been reduced from $10,000 to $9,250, and his itemized deductions would have been reduced from $12,500 to $11,750, which is less than the standard deduction of $12,000 that he would have taken in 2018. The difference between the taxpayer’s claimed itemized deductions ($12,500) and the standard deduction he could have taken ($12,000) is $500. Therefore, the taxpayer received a tax benefit from $500 of the overpayment of state income tax in 2018, and he must include that $500 in his taxable gross income in 2019.

About the Author: Karen A. Lake, CPA, is state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at

The Art of Bunching Deductions for Charitable-Minded Taxpayers by Joanie B. Stein, CPA

Posted on April 19, 2019 by Joanie Stein

Many individuals filing their first federal income tax returns since the enactment of the new tax law are surprised to learn that they were not able to write off the donations they made to non-profit organizations in 2018. While few people give to charity solely for a tax break, much ink has been spilled over whether the potential loss of the charitable deduction will cause taxpayers to cut back on their generosity or stop giving to charity altogether. The fact is the Tax Cuts and Jobs Act provides some philanthropic-minded taxpayers with an opportunity to change their giving strategies for greater tax efficiency and charitable impact.

The New Tax Law

Under tax reform, the charitable deduction is available only to those taxpayers who itemize their deductible expenses. With a near doubling of the standard deductions to $12,200 for individuals and $24,400 for married couples filing jointly in 2019, it is estimated that the number of households clearing this threshold and itemizing deductions for charitable contributions in 2018 is approximately half of what it was in 2017, before the passage of the TCJA.

On the other hand, the law provides taxpayers whose deductible expenses exceed the cutoff and are able to itemize their deductions greater tax savings for their charitable contributions. For tax years 2018 through 2025, the amount of the deduction itemizing taxpayers may claim for charitable cash gifts increases to 60 percent of adjusted gross income (AGI) while keeping the current deduction for gifts of appreciated assets at 30 percent of AGI. Moreover, the TCJA’s repeal of the Pease limitations means that high-income households can deduct significantly more of their qualifying itemized expenses through 2025.

Unfortunately, many taxpayers do not have a well-though-out giving strategy; they merely write checks to non-profit organizations here and there. The new law provides an opportunity for families to create a giving plan that allows them to make a greater impact on their favorite charities while at the same time improving their own tax circumstances.

The Solution: Bunching Charitable Gifts

One tactic families can employ to ensure they receive the full tax benefit of their philanthropic efforts is to bundle together two or more years of charitable donations into a single year. This strategy of “bunching” several years of charitable gifts into one year can push taxpayers above the threshold for itemizing deductions in that year and provide them with a deduction for the full value of their donation. In alternate years, taxpayers could give less and simply claim the standard deduction.

As simple as this may sounds, bunching deductions requires careful planning and timing of expenses. After all, philanthropy involves far more than making donations to non-profit organizations in exchange for tax savings. Rather, philanthropy is a state of mind and long-term commitment of time, money and resources to effectuate a positive change in communities around the world and the lives of the people who live there. It is a code of ethics and guiding principle that families share and pass down from one generation to the next. Therefore, philanthropic-minded families want their charitable giving to make a measurable impact on the organizations and people who receive their gifts. To best accomplish this goal, taxpayers may want to consider directing their bunched charitable gifts to donor-advised funds (DAF) that support the specific charities that matter most to them.

More about Donor Advised Funds

DAFs are savings accounts controlled by sponsoring organizations, such as financial services firms or community foundations, that accept and invest taxpayers’ irrevocable charitable donations and later distribute those funds via grants to designated charities. The funds themselves are 501(c)(3) charities that act as turnkey solutions to help taxpayers manage and maximize their charitable giving and tax efficiency. Because DAFs invest donations for tax-free growth, a gift to a DAF in one year can result in a larger grant to a recipient charity in future years.

In return for their multi-year, bunched gifts to DAFs, taxpayers receive an immediate tax deduction for the full amount of their gift in the year of contribution. For cash gifts, the annual deduction can be as much as 60 percent of the taxpayers’ annual AGI in tax years 2018 through 2025, or 30 percent of AGI for gifts of appreciated assets, such as securities, real estate or interest in a family business held for more than one year. By comparison, taxpayers who make charitable contributions to a private foundation can deduct up to 30 percent of AGI for cash gifts and only 20 percent of AGI for appreciated assets. These types of non-cash donations to DAFs or private charitable foundations also provide taxpayers with the ability to reduce or eliminate their exposure to capital gains tax on the appreciation of those assets while also giving a much larger gift to charity. When DAF contributions surpass the IRS limits, taxpayers may carry the deduction forward five years.

For example, a taxpayer who gives $6,000 to charity every year may not receive the benefit of a full tax deduction in each of those years. However, if the taxpayer gives $12,000 to a DAF every two or three years, he or she is more likely to clear the standard deduction ceiling and qualify to write off the full value of his/her bunched charitable gifts in those years. Moreover, because the DAF invests the taxpayer’s $12,000 gift, the recipient non-profit entity will receive the appreciated value of that gift.

The requirements for participating in donor advised funds varies from one sponsor to the next. Even though there is no law governing when or how often a DAF must grant assets to qualifying charities, most have policies in place requiring account owners to grant minimum gifts to nonprofits every few years to ensure that funds are put to work for charitable causes. However, DAF participants should note that while they will receive a tax deduction in the year of their contribution, their donations may not reach the intended charities in the same year. As a result, donors should investigate DAFs before making contributions to ensure that the selected fund squares with the donor’s unique philanthropic goals and philosophies.

Another Solution for Older Taxpayers

Charitable-minded taxpayers over the age of 70½ who are financially comfortable and do not need their individual retirement account (IRA) savings to fund their later years have another giving strategy available to them. More specifically, these taxpayers may make qualified charitable distributions (QCDs) from their traditional IRAs directly to certain non-profit organizations to satisfy their annual IRA required minimum distribution (RMD) obligations. While taxpayers will avoid income tax on the transferred amounts to non-profit entities, their QCDs will not qualify for a charitable deduction. Moreover, taxpayers should be aware that are specific rules prohibiting them from making QCDs to donor advised funds or private foundations or from SEP IRAs, SIMPLE IRAs or 401(k) plans.

Despite the changes that the new tax law brings to charitable deductions, most people will continue to give generously to those in need and carry on their philanthropic traditions. Yet, it behooves taxpayers to examine their existing giving strategies in light of tax reform and consider employing different methods to improve the charitable impact of their gifts and their potential tax savings.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.



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