SALT

One Big “Beautiful” Bill

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This post contains a non-exhaustive summary of the most impactful (to my clients) tax and personal finance-related provisions of the One Big Beautiful Bill (OBBB) that was passed into law on 7/4/2025. That’s the actual name of the Bill / Law, by the way, not an editorial on the Bill’s beauty. In fact, I put “Beautiful” in quotes in the title to give just the opposite impression. To be fair though, this Bill is to beauty about as the Inflation Reduction Act of the previous administration was to reducing inflation. Names of Laws don’t imply meaning, intention, or effectiveness of those Laws. That’s as far as I’m going to get into politics on this one. I’m also not going to get into the budget portions, appropriations, cuts to programs like Medicaid, etc. While the importance of those parts of the Bill probably surpasses the importance of tax changes to many Americans, this post is only about taxes and personal finance, where I can contribute most. I leave it to you to dive into the rest of the Bill as you feel is appropriate, using the sources you feel are appropriate. Better yet, give the 870-page OBBB a read yourself.

Many of the provisions are retroactive to the start of 2025 and so they impact taxes this year. Some begin later in 2025, some in 2026, a few even after that. Some provisions are permanent (meaning it would take a new law to change them). Some are temporary (meaning they will revert back to old law at a future date unless a new law is passed to extend them). I tried my best below to include the effective dates for each change. Please keep in mind that this is my personal interpretation of the OBBB after skimming it and cross referencing various other summaries that have been published. It is not guaranteed to be 100% accurate. Lastly, it will take some time to update tax projection software and really get into the details of what, if any, actions clients should take, given their current situation. Unlike other recent tax bills, which were passed in the final days of the tax year, this one gives time to interpret, project, and act. There will be more to come on those actions in the coming months.

Key tax and personal finance provisions of OBBB:

  • Current tax brackets made permanent (would have reverted back to pre-TCJA in 2026).  That includes the 10%, 12%, 22%, 32%, 35%, and 37% rates, as well as their income ranges for Single, Head-Of-Household (HoH), Married Filing Jointly (MFJ), and Married Filing Separately (MFS).  Those income ranges are adjusted upward annually for inflation.  The OBBB adds one additional year of inflation adjustments to the 10% and 12% brackets by setting their “base year” back to 2016 from 2017 starting in 2026. This effectively increases the 10% and 12% brackets for inflation twice in 2026 only, making those brackets higher, and reducing taxes slightly for everyone that pays any Federal tax.
  • Standard deduction made permanent (would have reverted back to pre-TCJA in 2026).  Increased slightly for 2025 to $31,500 for couples, $23,625 for head of household and $15,750 for individuals.  Inflation-adjusted going forward. 
  • New $6,000 personal exemption for those age 65+ (remains $0 for everyone else).  Acts like another standard deduction and phases out by 6% of the amount that MAGI (adjusted gross income plus excluded foreign income in most cases) exceeds $75k single / $150k MFJ.  Effective 2025-2028, only.  This new deduction was Congress’s way of trying to implement President Trump’s “no tax on social security” campaign promise.  Since the Budget Reconciliation process (requires majority vote in the Senate to pass instead of 60 votes) can’t make changes to Social Security, this new deduction is the best they could do.  Social Security taxation rules have not changed at all.  Contrary to the message the administration is putting out there, there is still tax on Social Security income if overall income is above certain thresholds.
  • New phaseout of deductions for those in the top (37%) tax bracket so that their deductions only reduce tax by 35%.
  • Child tax credit raised to $2200 / child + inflation and made permanent (would have reverted back to $1k in 2026).  Still phases out starting at AGI of $200k single / $400k MFJ.
  • $500 Other Dependent Credit made permanent.
  • Gift/Estate tax exemption increases to $15M per person / $30M per couple in 2026 + inflation in future years ($14k now + inflation, so not a huge change, but would have reverted back to pre-TCJA in 2026) and permanent.
  • QBI deduction (this is better known as the 20% “small business deduction” created by TCJA) made permanent (would have ended for 2026).  Phase-in ranges for the §199A limitations increase to $75,000 for non-joint returns and $150,000 for joint returns (from previous $50k/100k).  Other enhancements in the initial House version did not make the final bill.
  • SALT deduction limit (which would have ended in 2026) increases to $40k for 2025 (from $10k) +1% per year.  This higher deduction limit will be in effect for 5 years (ends after 2029).  Applies to single or MFJ (so increases the marriage penalty), but MFS is only $20k (so increases the penalty for married filing separately, which already rarely makes sense).  Reverts back to $10k in 2030.  Phased out by 30% of the amount that AGI is > $500k (so fully phased out at $600k), but can’t go below $10k.  That $500k phase applies to both single and MFJ too (MFS = $250k). The cap is also indexed +1% per year.  A ban on certain state-level workarounds for businesses that were included in the House version of the Bill were NOT included in the final version.
  • Current AMT exemption made permanent but AMT exemption phaseouts reset to 2018 levels ($500k single / $1M MFJ) which backed out a few years of inflation.  Also cuts exemption phaseout to $1 for every $2 of AMTI over the threshold (vs prior $1 for every $4 of AMTI).
  • Mortgage interest deduction limited to $750k of debt made permanent.  Grandfathering of pre-TCJA mortgages at $1M still applies.
  • Mortgage insurance premiums deductible (as they were pre-2022) permanently.
  • Casualty loss deduction limited to Federally declared disaster area made permanent.
  • Elimination of the moving expenses deduction made permanent
  • Elimination of miscellaneous itemized deductions by TCJA (e.g. unreimbursed employee expenses, business mileage, home office deduction) made permanent (i.e. you cannot deduction business mileage, home office, etc. as an employee).
  • Charitable Deduction changes (starting 2026):
    • For non-itemizers a new, permanent deduction of up to $1k single / $2k MFJ.  No income phaseouts. Only direct cash contributions qualify (no property, no DAF, etc.)
    • For itemizers, a new, permanent floor of 0.5% of AGI for deductibility (e.g. if you earn $200k per year, the first $1000 of charitable contributions would not count toward an itemized deduction)
  • Deduction for gambling losses (already limited to gambling gains) limited so that only 90% of losses could be considered.  Means even those with net losses in a year could be taxed on gambling “income”.
  • Dependent Care Credit enhanced to 20-50% of up to $3k/child (max 2) of expenses (from 20-35%).  Permanent.
  • Dependent Care FSA limit increased to $7500 from $5k.  Permanent, but not inflation-adjusted.
  • Tax exclusion for employer-paid student loan assistance permanent
  • “No tax on tips” – New deduction (separate from itemized deductions, but after the calculation of adjusted gross income) for up to $25k (all filing statuses except MFS, which gets $0!) of tips included in income.  Effective 2025-2028.  Tips must be voluntarily paid in customary tipping occupations.  All SSTB (specified service trades or businesses) are excluded.  Deduction phases out at 10% of income over a threshold of MAGI starting at MAGI of $150k single / $300k MFJ.
  • “No tax on overtime”– New deduction (separate from itemized deductions, but after the calculation of adjusted gross income) for up to 12.5k single / $25k MFJ / $0 MFS of overtime pay included in income (shown on W-2).  Effective 2025-2028.  Deduction phases out at 10% of income over a threshold of MAGI starting at MAGI of $150k single / $300k MFJ.
  • Auto Loan Deduction – up to $10k of interest per year would be deductible on auto loans from 2025-2028.  New vehicles purchases only (no leases or used cars), with final assembly in the US. Deduction phases out at 20% of income over a threshold of MAGI starting at MAGI of $100k single / $200k MFJ.
  • Enhanced Affordable Care Act (“Obamacare”) Premium Tax Credits were not extended.  These increased the tax credit for (“the subsidy”) for ACA purchased health insurance and implemented a new, slower phaseout to the credit for those earning more than 4x the federal poverty level in income.  They were increased for 2021 and 2022 and then extended by the Inflation Reduction Act, but have now been allowed to revert back to the original ACA level with a hard cliff at 4x the federal poverty level.  This means that if you purchase your health insurance through a state ACA exchange and you currently receive a subsidy to offset the cost of your insurance, starting in 2026 that subsidy may be reduced and / or you may have to pay part of it back when you file your taxes.
  • HSA Enhancements -the broad HSA enhancements that were part of the initial House version of the OBBB, including doubling the max HSA contribution, were not included in the final Bill.  These changes were included:
    • Telehealth visits with deductible waived, won’t disqualify plans from being HSA eligible.  Starts 2025 when the old laws that allowed this during COVID expired.
    • All ACA Bronze and Catastrophic health plans will be HSA eligible, regardless of whether they would otherwise qualify.  Starts in 2026.
    • Direct Primary Care arrangements with subscription costs not exceeding $150/mo individual / $300/mo family can be HSA-eligible.  Additionally, HSAs can be used to pay those subscription fees.  Starts in 2026.
  • Credit for the purchase of new and used electric cars ends 9/30/2025 instead of 12/31/2032.
  • Credit for energy efficient home improvements ends 12/31/2025 instead of 12/31/2032.  This was the up to $1200/yr for energy efficient doors, windows, HVAC, water heaters, etc.
  • Credit for installing certain residential renewable energy systems such as solar, wind, geothermal, batteries, etc. ends 12/31/2025 instead of 12/31/2032.  This includes the 30% credit for solar installations.
  • 100% Bonus Depreciation restored for business assets purchased on or after 1/20/2025.  Permanent.
  • Section 179 expensing permanently increased from $1.16M to $2.5M, with phase-out starting at $4M.
  • Business loss limitation provision from the TCJA made permanent.
  • Employer credit for paid family and medical leave permanent.
  • Opportunity Zones permanent with several changes including the definition of a low-income community.  Effective 1/1/2027.  More guidance will be necessary on this one as Opportunity Zones were already a very complicated portion of the TCJA.
  • New 100% credit for donations up to $1700/yr to state-approved Scholarship Granting Organizations (SGOs).  Scholarships received from those organizations for qualified elementary or secondary education would be tax-free.
  • Expands the allowable uses of 529 accounts to include K-12 education expenses (previously just tuition, with a cap, now more broad) and allows 529s to be used for “qualified postsecondary credentialing expenses” (seemingly certificate programs).
  • New 1% excise tax starting in 2026 on certain money transfers funded from cash, money orders, cashier’s check, or similar, rather than bank account, credit card, or debit card, sent from the US to an international destination.  A new tax credit is available to offset the excise tax if it is paid by a US citizen or US resident.
  • Many changes to student loan annual and lifetime maximums as well as repayment plan options.
  • “Trump Accounts” – IRAs established for minors that will follow most Traditional IRA rules.  Contributions can start 7/4/2026.  $1k granted per child born between 2025 and 2028 by the Feds.  Additional contributions of up to $5k / yr allowed until child turns 18.  No deduction.  Tax-deferred (not tax-free) growth, with distributions taxed at ordinary income rates.  With few exceptions, can’t be accessed prior to age 18.  Seems to follow the IRA rules for access prior to age 59.5 with penalties unless due to death, disability, home purchase, etc.  Must be invested in a low-cost US mutual fund or ETF.  Employers can contribute up to $2500 pre-tax for the employee.  Withdrawals after age 18 taxed pro-rata (gains and untaxed employer contributions taxed as income, after-tax contributions returned tax-free). 
  • 1099 Reporting changes –
    • The minimum threshold to report payments to individuals engaged in a trade or business (1099-MISC / 1099-NEC) increases to $2000, from $600.  Inflation-adjusted starting in 2026.
    • The minimum threshold to report third-party network transaction via 1099-K (e.g. Venmo, Paypal, etc.) reverts back to $20k or greater than 200 transactions.  That was scheduled to be reduced to $600 starting in 2026.
  • Qualified Small Business Stock (QSBS) – increases the max gain exclusion from $10M to $15M and creates new partial gain exclusions for stock acquired after 7/4/2025 where 50% of the gain can be excluded if held for 3-4 years or 75% if held between 4-5 years. 100% exclusion still occurs at 5 years.

Build Back Better Act, Property Taxes & Q4 Estimated Tax Payments

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Rumor has it the Senate is ending session and heading home for the year tomorrow, and their version of the Build Back Better Act (see my last update for what’s included in the House version of the bill) hasn’t even been drafted, so it seems very very unlikely that anything will pass by end of year. That means at least a temporary end to Advance Child Tax payments, the expanded Earned Income Credit, and host of other pandemic-related programs. It also means no changes to retirement plans for now (i.e. the back-door Roth and mega-backdoor Roth remain), but those are definitely on the chopping block for a future bill. I don’t expect them to survive 2022. Lastly, it means that there won’t be a change to the 2021 State And Local Tax (SALT) deduction, again, for now. Build Back Better will re-emerge in 2022 for certain, perhaps with some provisions that are retroactive to 2021, though with a split Senate and a lack of support from at least two Democratic Senators, it’s a heavy lift to get BBB approved next year as well in it’s current form.

The fact that SALT won’t be changing for 2021 means that for those of you sitting on property tax bills for your residence or vacation home (rentals don’t matter…  property tax is always deductible on rentals) or determining if you should make state estimated tax payments for Q4, you should operate under the assumption that the SALT (State And Local Tax) cap will remain at $10K.  It’s possible that it could be retroactively changed in 2022 for 2021, but at that point, it will be too late to do anything for 2021 anyway.  That means that if both of the following are true:

  1. you already have $10K+ of state income taxes paid (check paystubs + estimated tax payments if you made any to cities/states to confirm) or sales tax paid in the case of a no income tax state (use IRS lookup for that https://www.irs.gov/credits-deductions/individuals/use-the-sales-tax-deduction-calculator) for calendar 2021  + property tax paid for calendar 2021 (check escrow statements if you escrow, otherwise you should know what you’ve paid) AND
  2. your 2022 will look similar to 2021 from an income/deductions/SALT standpoint…

… then there is no incentive for you to pay property taxes or state estimated tax payments in 2021 that could be deferred to 2022 (some municipalities allow this…  if yours doesn’t, then the point is moot for you). 

If you don’t already have $10K+ of SALT for 2021, then paying property taxes or state estimated tax payments in 2021 can still be beneficial if you will itemize your deductions on your taxes 2021.  To itemize, for most people, your SALT + mortgage interest + charitable deductions need to exceed the standard deduction ($12,550 single, $18,800 head-of-household, $25,100 married filing jointly).  If you can’t itemize in 2021, then deferring property taxes / state estimated tax payments to 2022 in hopes of being able to itemize then makes sense.

If you know you will not itemize in 2022 but will itemize in 2021, then you could pay property taxes and/or state estimated tax payments in 2021 even if you’re over the SALT limit.  The thinking there is that you wouldn’t be able to deduct those tax payments in 2022 no matter what, so if you pay them in 2021, it sets you up to take advantage of a retroactive SALT deduction increase if such a thing becomes law in 2022.

If you know that you will not itemize in 2021, but will in 2022, then defer property taxes / state estimated tax payments to 2022.

This fun game of “Will I get a tax deduction” is very likely to continue into 2022. We can only hope that the rules for 2021 are finalized in advance of the April 15th, tax deadline for 2021 and maybe, just maybe, the rules for 2022 could be settled before December 2022.

Tax Increases & Retirement Funding Limits Incoming

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The House Ways and Means Committee released a tax plan designed to pay for (part of?) the bi-partisan Infrastructure Bill and the larger spending bill that Democrats are trying to pass through a process known as “reconciliation”.  The House tax plan contains fewer tax hikes and fewer changes to the tax code overall than President Biden’s initial plan released earlier this year.  While the President’s plan always seemed unlikely to garner enough support, the House plan has the makings of a real starting point for negotiation.  The Senate is moving forward with its own legislation and eventually, both Chambers will need to pass a bill, then reconcile into one bill which is re-passed.  With the Democrats having slim margins in both the House and Senate (courtesy of the VP tie-breaker there), it will be difficult to get enough support from the progressive and more moderate side of the party at the same time.  They’ll either need to do that or bring some Republicans on board in order to get enough votes to pass the broad package.  In summary, there are bound to be a lot of changes to the details here, but we’re close enough to actual proposed legislation, that I thought it would be a good idea to lay out the key portions of the current proposal.  As a side note, there is a fair shot that some/all of the changes will wind up being last minute, end-of-year, potentially retroactive to this year changes.  The timing of enactment and the effective date of each change are going to determine whether or not any action can/should be taken to minimize the impact of tax hikes, or take advantage of temporary opportunities for deductions, credits, etc.  December is going to be a fun month tax-wise, as it has been for the past several years.  Stay tuned.

Currently Included in the House Plan:

  • An increase in the top marginal income tax rate from 37%, back to where it was pre-TCJA at 39.6%.  In addition, the 32% and 35% brackets would be compressed so that the top bracket begins at $400K Single / $450K Joint.
  • A 3% “surtax” on those earning more than $5M in a given year.  A surtax is just a fancy way of adding to the income tax rate, effectively creating a new top bracket of 42.6% for those earning > $5M.
  • An increase in the tax rate on long-term capital gains (LTCG) tax for upper-income taxpayers (in the top tax bracket for LTCG which starts at ~$450K single / 500K joint) from the current 20% to 25%.  Note: this provision would become effective as of 9/13 if I’m reading it correctly (i.e. sales prior to that date would be taxed at the existing rate, sales on or after would be taxed at the new rate).  If true, there’s no ability to sell in advance, though since the rate is only going up 5%, and that might change in a future administration, I can’t see why anyone would sell anything other than for a short-term need anyway.
  • A decrease in the corporate tax rate from the current 21% to 18% for low-income (up to $400K) corporations and an increase to 26.5% for high-income (over $5M) corporations.
  • Limits on the 199A “20% small business deduction” to a max of $400K Single / $500K Joint.  Those aren’t income limits to take the deduction…  they’re limits on the max amount of the deduction.  There had been an alternate proposal (Wyden plan) to eliminate the Specified Services Trade or Business provisions as well as the W-2 income and unadjusted basis of assets provisions, and instead just institute income limits.  That’s not included in the House plan.  (Of course it’s not…  it would have simplified something!)
  • Contributions to IRAs / Roth IRAs would be prohibited if their value (in aggregate in case there are multiple accounts) exceeds $10M in value and income for the year exceeds $400k single / $450k joint.
  • Add a new Required Minimum Distribution (RMD) to IRA, Roth IRA, and defined contribution (e.g. 401k) accounts (in aggregate) that exceed $10M in value if income for the year exceeds $400k single / $450k joint.  The RMD would be 50% of the amount that exceeds $10M.  Additionally, if the balance of those accounts exceeds $20M, a 100% distribution is required from the Roth portions until the total balance is less than $20M or the Roth accounts are exhausted.
  • Roth IRA conversions and 401k Roth Conversions would be prohibited for those with income over $400k single / $450k joint.  Additionally, after-tax contributions to 401k and the conversion of after-tax contributions to Traditional IRAs would be prohibited regardless of income (i.e. the end of the “backdoor Roth” and the “mega backdoor Roth”).
  • IRAs would not be able to hold 1) private investments that can only be offered to “accredited investors”, 2) securities in which the owner has a >= 50% interest (10% if not tradable on an established securities market), and 3) the securities of an entity in which the IRA owner is an officer.
  • Lifetime gift / estate tax exclusion is reset to its 2010 level of $5M per individual (adjusted for inflation) instead of that happening after 2025 as scheduled by TCJA.
  • Changes to bring most Grantor Trusts back into the estate of the grantor and to eliminate the valuation discount frequently used when gifting portions of family limited partnerships (FLPs) to the next generation.
  • More money for the IRS to boost its audit programs.  Everyone hates and audit, but this is sorely needed.  The IRS lacks the resources to keep up with tax cheats.

Notably Not Currently Included:

  • Increase in the State And Local Tax (SALT) maximum deduction.  This is the cap put in place as part of the TCJA that limits both single and joint filers to a maximum Federal deduction of $10k for taxes paid to states and localities.  Several high-tax state representatives in the House have said they will not vote for any tax and spend package that doesn’t relax the current SALT limit, and House leadership has implied that a change to the SALT deduction is still on the table and may be added to the bill at a later date.
  • Loss of Basis “Step-Up” at death.  This feature of the current tax code allows those who inherit property (real estate, securities, farms, businesses, etc.) to have the cost basis of the property reset to its value on the date of death of the owner.  This allows substantial gains to go untaxed if the property is held until death.  The President’s tax plan would curb basis step up, but such curbs were not included in the recent draft from the House.  The head of the Senate Finance Committee has indicated that this may wind up in the Senate bill, so it’s not dead yet either.
  • Elimination of tax-free loans from securities portfolios.  The current tax code allows owners of brokerage accounts to use the account as collateral to take out loans.  The proceeds from the loans can then be used to support expenses, rather than selling assets and potentially paying capital gains tax on those sales.  This practice helps to avoid selling assets such that basis can be stepped up at death (see bullet above) and capital gains tax is never collected.

IRS Squashes Most State SALT CAP Workarounds

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When the Tax Cuts and Jobs Act (“TCJA”) was passed in late 2017, the standard deduction was increased and certain itemized deductions were eliminated or capped as an offset. One of the most noteworthy is the State And Local Tax (“SALT”) deduction, which allows taxpayers to deduct for Federal tax, what they pay in state/city income tax and property taxes on their residences. For many mid-upper income taxpayers in high-tax states, these deductions were already limited by the Alternative Minimum Tax (“AMT”) under prior law. Under the TCJA, SALT deductions are now limited to $10k per year for both single and married taxpayers. To give a real world example, if you make $150k and live in a state with a 6% effective tax rate, you’re $9k of state income taxes are still deductible, but only $1k of property taxes would be deductible on top of that.

Some states have taken action to try to circumvent the SALT limits by enacting laws that allow the creation of charitable funds to which taxpayers can donate money and receive a state income or property tax credit offsetting the amount “donated”. CT, NY, and NJ have passed laws that do this, while CA, IL, and RI had pending legislation as of June. Others are definitely looking into it. In late May, the IRS released a statement that they would be proposing regulations that would emphasize “substance over form” in these types of arrangements, essentially reminding everyone that a charitable contribution for which you get a tax credit is just really a tax paid and not a charitable contribution. Yesterday, the IRS released new regulations as promised. They also released a summary statement (below), which captures the essence of the regulations. That is, if you make a contribution to one of these charitable funds and receive a tax credit in return, the amount of the credit has to be subtracted from the contribution to determine your deductible amount. In other words, the work around created by these states won’t help.

The regulations go into effect on 8/27/2018, though the IRS points out that they’re not really a change of prior law (one was always required to subtract the benefit received from a charitable contribution to arrive at the deduction), but just a clarification. Technically though, you could make the argument that the law was previously unclear and that if one made a contribution pre-8/27 to one of these funds, it should be treated as a charitable contribution. The odds of audit increase in doing so, and there’s a decent chance that the IRS would nix the contribution, but for those who want to take a shot, that shot is probably available. Of course before doing so, you should of course check with a CPA, EA, or tax attorney to get a qualified tax opinion on the matter. The point is moot in most locations, because most states haven’t enacted laws that allow these types of funds to be set up. Even NJ and CT, who have enacted laws, have not, to my knowledge, set up the funds administratively. Why some municipalities in NY may have set them up (Scarsdale being one), most don’t seem to be available there either. If you have the option of making a contribution to one of these charitable funds in your state (meaning they passed legislation allowing the funds and the state or municipality actually set one up to receive money already), AND you’re comfortable making the claim that the limits imposed by the IRS regulations are new rather than clarifying existing law, then it would benefit you to make the contribution before 8/27. For all others, I don’t believe there’s any action to take on this.

You should also be aware that NY, NJ, MD, and CT have sued the Federal government over the SALT deduction caps as being unconstitutional. A few states have also threated that they will fight any IRS regulations that attempt to limit workarounds (e.g. the regulations that were released yesterday). I’m definitely not a legal expert, but it feels like this one is going to drag on for a very long time until we have a firm answer. With that said, the law of the land as of 8/27 (and probably before) is that if you make a charitable contribution and receive a tax credit in return, your Federal deduction is limited to the difference (in most cases, see below for details).

Lastly, existing programs that allow contributions to education or medical charitable funds in exchange for tax credits (e.g. GA’s GOAL program) are also impacted by this. The IRS has stated that it previously let those go because if the charitable contribution wasn’t made, then the state income tax paid would be higher and that was previously deductible for most tax payers (except those in AMT) anyway. You can still contribute to those funds and get a state tax credit for doing so, but the Federal charitable deduction is no longer available, at least starting 8/27.

From the IRS:

“

Treasury, IRS issue proposed regulations on charitable contributions and state and local tax credits

WASHINGTON — Today the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit.

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

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