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California lawmakers looking to challenge IRS proposed regulations

September 05, 2018

SB 539, a bill increasing California's College Access Tax Credit from a 50% credit to a 75% credit, has been passed by the Legislature and sent to the Governor. It is unclear whether the Governor will sign the bill, which is an attempt to counteract the $10,000 on state and local tax deductions on federal returns, by presuming that donors will be able to claim a full charitable contribution deduction on their federal return. However, the California credit is in direct conflict with the IRS's proposed regulations reducing deductions for charitable contributions for which a state tax credit is claimed. (IR-2018-172)

The proposed regulations label these transactions as a nondeductible quid pro quo and require taxpayers to decrease the amount of their charitable contribution deduction by the amount of the state credit claimed, unless the credit is de minimis (15% or less than the amount contributed).

If the Governor does sign the law, expect to see litigation on this issue.

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