Regulations issued by the IRS on June 11 severely limit the...

Regulations issued by the IRS on June 11 severely limit the effectiveness of charitable reserve funds, such as one planned by Suffolk officials as a workaround to the SALT deduction limit passed in late 2017, tax experts said. Credit: AP / J. David Ake

New Internal Revenue Service regulations have forced Suffolk officials to shelve a plan they said could have helped property owners avoid thousands of dollars in higher federal taxes under President Donald Trump’s 2017 tax overhaul.

The plan, approved by the Suffolk Legislature in April, sought to let taxpayers work around a $10,000 cap on state and local tax deductions by rebranding property tax payments as charitable contributions.

In lieu of their property taxes, homeowners would pay an equivalent amount to a charitable gifts reserve fund and be able to claim federal charitable tax deductions on 95 percent of the contributions.

But regulations issued by the IRS on June 11 severely limit the effectiveness of such charitable reserve funds, tax experts said.

Under the IRS regulations, a property owner who contributed $1,000 to Suffolk's charitable reserve fund could only deduct five percent, or $50, said Frank Sammartino, a senior fellow at the Urban-Brookings Tax Policy Center, a nonpartisan think tank in Washington, D.C.

Suffolk officials, who were planning to set up the charitable fund in time for the 2020 tax year, say they've decided not to roll it out at this time.

“We in no way, shape or form want to confuse taxpayers,” said Steve Randazzo, Suffolk's deputy director for performance management.

The county is considering legal action to strike down the IRS regulations along with a group of New York municipalities called the Coalition for the Charitable Contribution Deduction, Randazzo said.

The coalition, formed before the IRS regulations were finalized, has hired Baker McKenzie, a global law firm with a New York City office, to review them and make recommendations about a potential lawsuit, he said.

“We are exhausting every possible remedy or outlet to pursue taxpayer relief and to protect Suffolk County homeowners and taxpayers,” Randazzo said.

The federal tax law capped deductions for state and local taxes at $10,000. 

Critics said the law would unfairly harm residents in high-tax areas such as Suffolk and Nassau counties. In Suffolk, the average local property tax payment in 2018 was $9,472, according to ATTOM Data Solutions, a California-based company that analyzes property data.

Overall, however, the federal tax legislation provided tax cuts for most people, even in higher-tax states, Sammartino said.

After the federal law passed, Suffolk County Executive Steve Bellone and Gov. Andrew M. Cuomo, both Democrats, were among officials who proposed charitable funds to work around the tax cap.

Such funds have existed for decades, but received limited attention before the new tax law, said Kirk Stark, a tax law professor at UCLA School of Law in Los Angeles. He said at least 33 states already have such funds for other purposes that are impacted by the new IRS regulations.

Suffolk officials had proceeded with the charitable reserve fund plan even though the IRS had said such workarounds to the SALT cap would not be allowed under proposed regulations.

When Bellone announced his plan this past winter, he said he was ready to challenge the IRS regulations in court. The charitable fund was part of Bellone's SALT Cap Relief Plan, which included reduced mortgage fees and provided tips to homeowners for dealing with the federal tax cap.

After the IRS regulations were finalized, Cuomo said state officials would “pursue all options, including litigation, to resist this attack on our state and our taxpayers.”

But Stark said New York officials would face a “higher hurdle” because courts often defer to IRS regulations, which require public hearings and comment.

Still, with the SALT cap set to expire in 2025, a lawsuit could help put pressure on federal lawmakers to let it end or change it earlier, Stark said.

“Even if this litigation that Suffolk pursues is unsuccessful, it will have the value of highlighting this issue,” Stark said.

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