What do you mean by “priority”? I have to pay taxes to both the federal government and the state.
Under the old system, where state & local taxes were fully deductible (ok, AMT, but let’s assume it was so for the sake of argument), the state got to tax you first, and the federal government took its percentage of your income net of state taxes. So in a state with 5% income tax, the federal government took its cut based on 95% of your gross. In a state with 10% income tax, the federal government took its cut based on 90% of your gross. (Obviously property tax is not a straightforward percentage of your income, but the same principle applied.)
That’s the federal government allowing the states to tax people as much as they wish, and then being happy with taking its cut afterwards, i.e. accepting a smaller amount of federal tax from states that choose to impose high taxes.
Whether you think that’s right is obviously 100% political.
By this definition, there is no such thing as a tax deductible charitable contribution. As soon as any charitable contribution becomes tax deductible it is no longer a charitable contribution.
No, that’s perverse. The IRS says, quite reasonably, that if you get no compensation for your charitable contribution (i.e. it really is charity), then you get to make the contribution out of your pre-tax income. You cannot come out ahead.
I repeat. This is already being done. You can in some states “allocate a portion of [your] owed state taxes to private nonprofit scholarship-granting organizations that issue scholarships to K-12 students.” This both “pays” your taxes and gives you a charitable deduction. see Policy Research
This is also done for environmental contributions in other states. Apparently the IRS already allows this. As long as California the money doesn’t go directly to the California treasury but to some set up endowments for things that are traditionally charitable, like feeding or housing the needy, environmental clean-up, schooling costs, I’m not sure how they could disallow what California proposes and continue to allow the other states to do the same thing.
That’s the rule though. In a corporate setting, especially public ones, obviously they do not make contributions without the intent of some sort of benefit, but the benefit tends to be completely intangible and absolutely impossible to calculate. The IRS may know that a corporation only donates money when it thinks it’s in its best interest, but I’m fairly sure they only care about direct quid pro quo, which is what this situation basically this.
They aren’t going to throw people in prison over this though - people will just get penalties for overstating deductions with no substantial authority. And certainly they can’t audit everyone, but that’s why there are penalties on top of having the pay the extra tax when an audit shows that you owe more tax than you initially claimed.
Intangibles aside, all donating businesses get at least one tangible and very obvious benefit: a tax deduction. So if the rule is enforced on a single-income taxpayer it’s immediately challengeable on the basis of fairness.
Not sure how much to trust a reporter who can’t do basic math:
Half that amount is $9,200. If it was over $20,000 why say it was “over $18,400”?
As for the plan, I’m not counting on it. If it works, I’ll be pleasantly surprised.
But they are getting a compensation. The tax deduction.
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Certainly, a state can establish a charity, but that doesn’t necessarily mean that a state can be a charity. If California uses this fund as a replacement for general tax revenue and expends those funds toward general governmental operations, I expect that the IRS will deny any deduction.
Suppose a CA resident makes a $10,000 donation to the ACLU, 501(c)(3) non-profit eligible to receive charitable contributions. One of the results of that donation is that for federal purposes, the taxpayer gets to claim a deduction for federal purposes. Another result is that as a CA resident, CA allows that person to deduct the same amount against their CA tax liability. As a state, CA does not have to allow deductions for charitable contributions, but they do so. How is this different?
The only distinction I could see is that the State of CA effectively controls the CA Excellence Fund. But this is only an assumption, since there is no such thing as the CA Excellence Fund yet. Conceivably, the state could offer the exact same benefit for donations to the ACLU, and lo and behold, they do. Basically, the state can control what it considers to be a deduction for state tax purposes and the IRS has nothing to do with it from a state tax perspective.
The only avenue I could see as a potential problem is if the IRS doesn’t consider the donation to the CA Excellence fund to be deductible. It’s true that if there is a quid pro quo relating to the donation then the deductibility would be in question - but that thing related is not typically construed to be the deduction itself. That would be silly and lead to an absurd result. So unless the donation is earmarked for the particular taxpayer, I don’t see the problem based on the current IRS rules.
Congress could prevent this by disallowing deductions for charitable contributions to municipalities, or in a number of other ways. They’d have to pass another tax law, so I’m skeptical if they would come together to do so.
Erm, how on earth is it the same? Making real charitable deductions deductible at both the state at federal levels is in no way analogous to falsely characterizing a state tax payment as a charitable deduction.
instead of characterizing the difference, you just put the words “real” and “falsely”.
I’m not sure how many times this can be explained. It isn’t a state tax payment. A California resident makes a charitable contribution to the California Excellence Fund. They take that charitable deduction on their federal taxes. They also get a credit against their California taxes. This is exactly what is being done already in numerous other sates. I suppose Congress could change the tax law so that charitable contributions that entitle you to a state tax credit are not deductible, but currently by practice, they are.
We don’t know what the Fund supports. It could, for example, make contributions to the California University system. That is an activity that would make the fund a charity and eligible to receive deductible contributions. I’m sure there are other things it could do.
The LA Times described it as “the state’s version of setting up a shell company in the Cayman Islands in order to shelter Californians’ income.”
Be interesting to see how this plays out.
It has a faint whiff of the “Freemen on the Land” approach to it. I think the IRS is generally unsympathetic to schemes along the lines of “I’ve come up with a totally clever way of re-labeling things, which happens to leave me owing a lot less federal tax than before I became so clever.”
Look at the fact pattern. A charitable contribution to the ACLU is deductible at both fed and state levels in CA for those who itemize. The reason this is so for fed purposes is because the ACLU is a qualified organization under IRS publication 526. The reason this is so for state purposes is because of FTB allows it. In fact, you can do this easily to CA Voluntary Contribution Funds (VCF) directly on your tax return. If we assume that the CA Excellence fund will also be a qualified organization of this nature, it would have nearly the exact same fact pattern, i.e. the same. Can you identify the ways in which it is different?
Obviously because it’s not real charitable payment, it’s a sham charitable payment.
The state would not give the 100% tax credit unless all the money flowed right to the state rather than any other “charity”; and the taxpayer would not make the “charitable” donation unless he knew he was sure to get the 100% tax credit. That’s a straightforward 1-for-1 quid pro quo, it’s obvioualy a sham. The state can pass a law to call it a charitable donation under state law, but that doesn’t make it so under federal law, and federal law will govern whether it’s deductible for federal taxes.
When you make a real charitable contribution to the ACLU, the money stays at the ACLU. Neither the state nor the federal government benefit. And the corresponding deductions only partially offset, the donor is still giving the majority of the money out of pocket.
Sounds like something Trump would definitely approve of.
Did you look at the VCF? One of the available charities is the CA Sea Otter Fund. The California Coastal Conservancy and the Department of Fish and Wildlife will each be allocated 50 percent of the contributions. Both of those are State of CA government departments. There is a 100% tax credit for those donations, and they are deductible at the federal level. The state benefits directly from this donation which directly contradicts your criteria. So again, how is this different?