https://www.wsj.com/articles/blue-state-charity-1534546826
Any day now the IRS will release new rules that address efforts by states including Connecticut, Oregon, New York and New Jersey to evade last year’s tax reform by masking tax payments as charitable contributions. The danger is that nonprofit scholarship organizations that are funded in part by tax credits could end up as collateral damage.
The issue arises because certain states—mostly left-leaning—have been looking for gimmicks to claw back the state and local deductions that were capped at $10,000 in the new tax reform. State politicians understand that because taxpayers can no longer fully deduct their high state taxes on federal forms, they are going to pay a higher price for their states’ big-spending ways.
Governors such as New York’s Andrew Cuomo have concocted a scheme to get around this. Essentially they’ve set up fake charities, which would collect in charitable contributions money that taxpayers formerly deducted from their federal taxes—which the states would then use to pay for state programs. Because the tax reform didn’t cap charitable deductions, taxpayers would effectively be taking a charitable deduction as a substitute for their formerly unlimited state and local tax deductions.
The IRS is rightly skeptical and in May issued Notice 2018-54 indicating it would adopt new regulations for such proposals. The danger now is that these new rules will not distinguish between “charities” that are really government fronts to collect taxes and Scholarship Granting Organizations that are not government entities, that do not funnel money back to the state, and that were set up by the states to expand opportunities for students.