Charitable Donations in Exchange for Real Property Tax Credits in New Jersey

On May 4th, 2018, New Jersey Governor Phil Murphy signed Senate Bill No. 1893 permitting municipalities to issue property tax credits to property owners who donate to one or more charitable funds created by the municipality where the taxpayer’s property is located.

New Jersey property owners may donate up to 90% of their tax bill to their municipality’s charitable fund(s). If the tax credits that result from a charitable donation exceed the taxpayer’s annual real property tax owed, the unused amount of tax credit may be carried forward to subsequent tax bills not to exceed five years.

Under the new law, a municipality establishes a charitable fund or funds, each with a specific public purpose, through an ordinance or resolution of its governing body. Charitable funds may also be used to satisfy property taxes, pay for the cost of establishing the fund and for the tax collector’s ongoing administrative expenses.

The purpose of S-1893 is to potentially allow for a larger itemized deduction on a New Jersey taxpayer’s federal income tax return that exceeds the $10,000 cap on deductions for state and local taxes imposed by President Trump’s tax overhaul bill. It is unclear whether an individual’s potential tax savings resulting from S-1893 will pass muster with the Internal Revenue Service because the taxpayer’s donation may not qualify as a charitable donation under the Internal Revenue Code. Accordingly, there is the potential for back taxes, penalties and interest at the federal level if the taxpayer’s deduction taken pursuant to S-1893 is not accepted. In light of this uncertainty it is best to contact a tax or accounting professional for advice with respect to the application of S-1893.