57-18 Exhibit - Urging State of New Jersey to Implement Charitable Trust in Lieu of Local Taxes Plan.pdf

Federal  Income  Tax  Treatment  of  Charitable  Contributions   Entitling  Donor  to  a  State  Tax  Credit     Introduction     This   paper   summarizes   the   current   federal   income   tax   treatment   of   charitable   contributions  where  the  gift  entitles  the  donor  to  a  state  tax  credit.  Such  credits  are  very   common   and   are   used   by   the   states   to   encourage   private   donations   to   a   wide   range   of   activities,   including   natural   resource   preservation   through   conservation   easements, 1   private  school  tuition  scholarship  programs,2  financial  aid  for  college-­‐bound  children  from   low-­‐income   households,3  shelters   for   victims   of   domestic   violence,4  and   numerous   other   state-­‐supported   programs.   Under   these   programs,   taxpayers   receive   tax   credits   for   donations   to   governments,   government-­‐created   funds,   and   nonprofits.   Appendix   A   provides  a  partial  inventory  of  existing  state  charitable  tax  credits.     A  central  federal  income  tax  question  raised  by  these  donations  is  whether  the  donor   must  reduce  the  amount  of  the  charitable  contribution  deduction  claimed  on  her  federal   income  tax  return  by  the  value  of  state  tax  benefits  generated  by  the  gift.  Under   current   law,   expressed   through   both   court   opinions   and   rulings   from   the   Internal   Revenue   Service,   the  amount   of   the   donor’s   charitable   contribution   deduction   is  not   reduced   by   the   value   of   state   tax   benefits.  In  the  analysis  below,  we  refer  to  this  feature  of  current   law  as  the  “Full  Deduction  Rule.”  The  effect  of  the  Full  Deduction  Rule  is  that  a  taxpayer   can  reduce  her  state  tax  liability  by  making  a  charitable  contribution  that  is  deductible  on

 Full  Deduction  Rule  is  that  a  taxpayer   can  reduce  her  state  tax  liability  by  making  a  charitable  contribution  that  is  deductible  on   her  federal  income  tax  return.     In   a   tax   system   where   both   charitable   contributions   and   state/local   taxes   are   deductible,  the  ability  to  reduce  state  tax  liabilities  via  charitable  contributions  confers  no   particular  federal  tax  advantage.  However,  in  a  tax  system  where  charitable  contributions   are  deductible  but  state/local  taxes  are  not,  it  may  be  possible  for  states  to  provide  their   residents  a  means  of  preserving  the  effects  of  a  state/local  tax  deduction,  at  least  in  part,   by  granting  a  charitable  tax  credit  for  federally  deductible  gifts,  including  gifts  to  the  state   or   one   of   its   political   subdivisions.   Congress   first   introduced   differential   treatment   of   charitable   contributions   and   state/local   taxes   in   the   Tax   Reform   of   1986,   when   it   amended                                                                                                                           1  See   Jeffrey   O.   Sundberg,   State   Income   Tax   Credits   for   Conservation   Easements:   Do   Additional   Credits   Create   Additional   Value?,   Lincoln   Institute   of   Land   Policy   (2011)   (p.   26,  Table   1,   listing   state   tax  credits  as  of  2011)  (http://www.lincolninst.edu/publications/working-­‐papers/state-­‐income-­‐tax-­‐ credits-­‐conservation/easements).   2  See   Carl   Davis,   State   Tax   Subsidies   for   Private   K-­‐12   Education,   Institute   on   Taxation   and   Economic   Policy  (October  2016)  (https://itep.org/wp-­‐content/uploads/k12taxsubsidies.pdf).   3

Private   K-­‐12   Education,   Institute   on   Taxation   and   Economic   Policy  (October  2016)  (https://itep.org/wp-­‐content/uploads/k12taxsubsidies.pdf).   3  http://www.treasurer.ca.gov/cefa/catc/index.asp  (CA  College  Access  Tax  Credit).   4  https://dss.mo.gov/dfas/taxcredit/dvtaxcredit.htm  (MO  Domestic  Violence  Shelter  Tax  Credit).   Electronic copy available at: https://ssrn.com/abstract=3098291