SPRINGFIELD, N.J. (CBSNewYork) – New Jersey residents looking for property tax relief in the form of charitable donations may need a backup plan.

While Gov. Phil Murphy signed a bill last month that would allow the practice, CBS2’s Lisa Rozner explains the IRS could put a stop to it.

The middle class may take the hardest hit with the $10,000 federal cap on state and local tax deduction, with some calling this a de facto tax hike.

“It means we will have to pay taxes on our taxes and the average New Jersey family that itemizes taxes will lose a deduction of $8,000,” said Sen. Robert Menendez.

Last month Murphy signed bipartisan legislation allowing municipalities to establish charitable funds.

Instead of writing a check to a municipality for property tax payments, a home owner would “donate” to these funds and receive up to a 90 percent tax credit in receipt.

But a few weeks later, the IRS issued a notice is was working on regulations and “taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

On Monday, Sen. Robert Menendez, who sits on the finance committee, sent a letter to the acting IRS commissioner.

“I just wrote a letter signed by majority urging the IRS to treat New Jersey just like 32 other states who have similar charitable contribution programs on the books,” he said.

It is unclear what kind of recourse New Jersey will have if the IRS does block Murphy’s legislation, but real estate agents say the discussion is already affecting business.

“It’s kind of taken away from some of the incentives for first-time buyers and, coupled with rising interest rates, they’re starting to think in terms of rentals,” said Gary Large, past president of the New Jersey Realtors Association.

“That’s the first thing they want to know, what are the property taxes so accordingly any kind of deduction people can qualify for would be beneficial,” said real estate attorney Clara Harelik.

Tax attorney Gary Botwinick says the IRS may challenge the charitable deductions by considering them a personal benefit, and then the state will be hard pressed to find another solution.

“State legislatures can reduce the taxes, that would be one way to fix the problem,” said Large. “People can also leave those states, but other than that it’s going to be expensive to live in these states.”

The IRS isn’t saying when in the near future it will announce regulations.


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