Under proposed regulations issued by the IRS on Thursday, transfers to a state agency or charitable organization in lieu of paying state and local taxes would be deductible as a charitable contribution only to the extent that the taxpayer making the donation did not receive a quid pro quo (REG-112176-18). Contributions that result in a state or local tax credit in return for the contribution would not be deductible for federal tax purposes to the extent of the credit; however, contributions that result in a state or local tax deduction may be deductible for federal tax purposes.
A number of states have enacted or are considering enacting programs that allow residents to make contributions to state agencies or charitable organizations in exchange for state and local tax credits.