Your Questions Answered: Township Charitable Trusts & Real Estate Taxes

By Marcia Geltman, CPA, Partner at Nisivoccia LLP

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The passage of the new 2018 tax law limiting the tax deduction for real estate taxes and income taxes has a significant impact on high tax states, such as New Jersey.  As a result, a proposed state tax law has been introduced to try and circumvent the negative tax impact.

The proposed law provides for the creation of township charitable trusts.  Residence would be able to make charitable donations to the trust and indicate that a portion of the donation be applied to offset their real estate taxes.  The portion of the contribution allocated to real estate taxes would be a maximum of 90%.  In addition, the towns would be able to allocate a portion of the contribution as well to reasonable administrative costs.  For example, an individual who makes a $10,000 charitable contribution to one of these trusts, might only get to reduce their real estate taxes by $8,900 (9,000 reduced further by reasonable administrative costs).

Since there is no limit on charitable contributions, an individual would be able to reduce their income tax liability despite the limitation on tax deductions.

It is important to keep in mind that not everyone will benefit from the proposal.  For instance, individuals who will be claiming the increased 2018 standard deduction may not receive the benefit of either state and local tax deductions, nor charitable contributions.  In addition, individuals who take advantage of this might lose all or a portion of the New Jersey real estate tax deduction of up to $10,000 currently allowed on their New Jersey state tax return.

The issue is whether the IRS would accept this plan.  The IRS relies on a concept called Quid Pro Quo.  The deductible charitable contribution is allowed only for the portion of the contribution in excess of the benefit received.  Therefore, if an individual receives a benefit of reduced real estate taxes, the charitable contribution must be reduced by that amount.

On the flip side, the New Jersey legislature argues the “full deduction rule.”  Courts in the past have consistently ruled that a charitable contribution deduction does not need to be reduced by any state or federal income tax benefits.

Will this same theory apply as well to reduced real estate taxes?

Chances are this will end up in the courts and may not be decided for years.

Will towns agressively go ahead and set up these trusts with the expectation that the full deduction rule will be upheld?  Will individuals be willing to contribute to these trusts with the understanding that an IRS audit may result?

Only time will tell.

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