On June 11, 2019, the U.S. Department of Treasury and the Internal Revenue Service issued final regulations that limit the amount of charitable deductions available to taxpayers who claim credits on their state income tax returns.
Popular Indiana credits include the college credit in which individuals may claim a credit up to 50% of the contribution amount donated to an in-state college (up to a maximum contribution of $400 on a jointly filed return) as well as the neighborhood assistance credit allowing a taxpayer to claim a 50% credit for amounts donated to a qualified organization participating in the Neighborhood Assistance Program (NAP) up to a maximum contribution of $25,000.
Prior to this decision you could deduct the entire amount of your contribution on your Federal return and, in addition, claim a credit for these donations on your Indiana return as well. Under the Final regulations just released, you must now reduce the amount of your charitable contribution claimed on your Federal return by the credit you receive from the state.
However, some taxpayers won’t notice the effect of the new regulations. This is due the safe harbor provision released by the IRS. It allows you to increase your state and local tax deduction by the amount of the charitable contribution disallowed. This can be done up to the new $10,000 limitation on state and local income tax deductions for taxpayers itemizing their deductions. Any excess must be carried forward to next year.