IRS Protects Charitable Donations for Private-School Scholarships

Treasury Department building in Washington, D.C. (APK)

The Treasury Department and Internal Revenue Service issued final rules that protect state-sponsored tax credit scholarship programs for private schools.

The Tax Cuts and Jobs Act Congress passed in 2017 had limited the state and local tax (“SALT”) deduction to $10,000. In an attempt to provide a government-sponsored tax shelter, several of high-tax states set up options for “charitable contributions” to fund various functions that could be deducted under federal law.

The IRS then proposed regulations aimed at closing this loophole, which would require taxpayers to deduct the total amount of these tax credits from the amount of SALT deductions claimed, thereby rendering the scheme ineffective at circumventing the cap. But this restriction could have had the same effect on the more than 15 states that, prior to passage of the tax overhaul, had scholarship funds set up to send low-income students to private schools that are supported by private tax-deductible donations. Many of the programs are funded exclusively by corporate donations, the future of which were not made entirely clear by the new proposals. School-choice advocates feared that this very lack of clarity could serve to discourage donors because they will not be sure they will receive a tax deduction.

Dozens of organizations, including advocates for yeshivah parents, submitted comments on the issue.

The final regulations issued this week ensure that donors who are otherwise below the SALT cap who donate to scholarship programs will still have their donation treated as a payment of state taxes, and therefore will still be calculated toward a federal tax deduction.

Orthodox Union leaders applauded the new rules.

“Our children’s education shouldn’t be dictated by their family’s ZIP code, but rather by their hard work and using their G-d given talents,” said OU President Moishe Bane. “These final regulations support greater educational opportunities for all children.”

“The revised, final regulations – and other steps we anticipate from the Trump Administration – are implementing the President’s promises to support school choice in the United States,” said Nathan Diament, Executive Director of the OU’s Advocacy Center.