'Donations' Could Help Illinois Cheat Federal Tax Law

By Cole Lauterbach | Illinois News Network

Lawmakers in high tax states are scrambling to find ways to keep other states paying for their local tax burdens. One method could involve donations to government. Congressional Republicans capped the deduction for state and local taxes at $10,000. This means that people paying high property taxes will have a higher federal tax bill than in years past.

Many homes in suburban Chicago pay well over $10,000 in annual property taxes. The changes in the federal tax reform bill sent hundreds of homeowners scrambling to their local treasurer’s office to pay their property taxes prior to the new cap taking effect on Jan. 1.

With states like California, New York and New Jersey looking for ways to get around the cap, Daniel Hemel, assistant professor at the University of Chicago School of Law, said Illinois’ state or local governments could set up charitable foundations and give tax rebates on them. This, coupled with a federal rebate for the charitable gifts to government, would effectively continue the federal subsidies of local taxes.

“The IRS has made clear that when you make a donation to a state-affiliated program and get a state tax credit in return, it’s treated as a charitable contribution,” he said. “Not as a payment of state or local taxes for federal tax purposes.”

Illinois just instated tax rebates for private school scholarship donations.

Hemel has been advising California, New York, Illinois, and Maryland on the ways in which they could get around the deduction limit. He thinks capping the deduction will hurt public spending on local education and infrastructure.

The report he co-authored says states could also supplant income tax with a payroll tax that is still fully deductible under the new tax laws.

Springfield CPA Allen Murphy of Murphy and Associates said some of the methods Hemel proposes may work, but he thinks the IRS would be quick to shut the scheme down.

“I’m sure that if the state of Illinois put something like this in place, the IRS would be looking at it very closely and possibly writing regulations to put the brakes on it,” he said. “The other possibility is Congress coming back and tweaking the law so that you don’t have the opportunity to do something like that.”

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