PA Educational Improvement Tax Credit ("EITC") Program takes a hit from the IRS

Action needed by Monday, August 27, 2018

August 24, 2018

Yesterday, the IRS announced proposed regulations that would reduce the deductible individual charitable contribution by an amount of any state tax credit received as a result of making such contribution. Say you donate $10,000 to PA's EITC program and receive a 90%, or $9,000, PA tax credit. Your federal charitable deduction would only be $1,000, the contribution minus the credit. This restriction applies to contributions made after August 27, 2018, so consider (if even possible) making your 2018 contribution on or before Monday August 27. As an example, if your entity has already been approved by the state, you should make your contribution today. However, if you are an individual investing through a special purpose entity (SPE), you may be logistically unable to make the contribution by Monday.

The IRS decision was designed to prevent taxpayers from circumventing the 2018 enacted $10,000 cap on deducting state and local income taxes combined with real estate taxes. Recall in a prior article that I had posed a scenario where the sum of the 90% PA tax credit combined with the federal tax benefit of making a contribution in lieu of paying more state income tax would exceed the contribution. Well, it looks like that loophole is about to close. Keep in mind that PA's EITC program was in place long before the $10,000 cap rule. For my part, the IRS is acting more so from the knowledge that other high tax states, e.g. New York, are taking steps to create programs to dodge the $10,000 cap.

The IRS regulations are "proposed" and not final. Is it possible that they'll be changed or lightened or that the effective date will be delayed? We'll see. A public hearing is scheduled for November 5, 2018.

One final note. PA's EITC program is still a great deal. In my example, contributing $10,000 for a net cost of $1,000 to help children in need is a win/win. And your cost will actually be less than 10% as you still should get a federal benefit on the $1,000.

Contact Bill Richardson at 412.594.7708 or with questions.