Whether taxpayers who gave to these funds in 2018 can claim a charitable deduction on their federal return for that year is also uncertain.
The IRS and Treasury’s proposed rule had an effective date of Aug. 27, 2018.
If you made a contribution to a state fund after that date and then claimed it on your 2018 federal tax return as a charitable donation, you’re risking a showdown with the IRS, said Daniel Rosen, partner in the North America Tax Practice Group at Baker & McKenzie.
“If the final regulations are issued with the retroactive date of Aug. 27, 2018, you’ll have to report on your return that you’re taking a position that’s inconsistent with the regulation,” he said.
“You’ve bought yourself a fight,” Rosen said.
Donors who want to continue giving to these funds will need to consider the extent to which the federal tax break matters to them.
“Certainly losing a federal benefit is a significant calculus to anyone looking to make a contribution to a state charitable fund,” said Rosen.
“But if you’re not motivated by the desire to get a deduction at the federal level, then your decision-making shouldn’t be affected by pending regulatory action,” he said.