In 2017, the average property tax bill paid by New Jersey property owners was $8,690; however, for 240 of the 566 municipalities, the average bill exceeded the state-wide average. In fact, the average tax bill in more than 150 municipalities exceeded $10,000.
When the United States Congress passed the “Tax Reform and Jobs Act of 2017” and the President signed it into law, a $10,000 cap on the deductions allowed for state and local taxes (SALT) impacted states with high property taxes such as New Jersey. In tax years before 2018, a New Jersey property owner, through itemized deductions on their annual federal tax return, could claim a deduction for state and local income tax and for the amounts paid for property taxes with no limit unless subject to the Alternative Minimum Tax (AMT). These property owners that normally pay in excess of $10,000 for property taxes alone now face a cap.
It was due to this cap that New Jersey Senate Bill 1893 was established. Signed into law by the Governor on May 4, 2018, New Jersey’s “SALT” Charitable Contributions Law authorizes municipalities, counties and school districts to establish charitable funds for specific purposes and permits property tax credits for certain donations. The goal of this law is to change the payment of property taxes into the payment of charitable donations rendering a different treatment for itemized deductions on the federal tax return.
How can property owners begin benefiting from this new law?
The law takes effect on July 3, 2018, and after implementing regulations are adopted by the Department of Community Affairs, Department of Treasury, and other appropriate State agencies. Regulations aside, only if the municipality, county or school district (“Local Unit”) establishes one or more charitable funds by the passage of an ordinance or resolution, can property owners begin benefiting from this new law.
What are the charitable funds mentioned in the law?
A local unit may establish by ordinance, or resolution, as appropriate, one or more charitable funds for specific purposes of that local unit. The specific purposes shall be more limited than the general purposes of the local unit and described in documents and records made publicly available. For example, a municipality may decide to establish a public safety charitable fund.
With the establishment of one or more charitable funds, what will prevent the over funding of these charitable funds leaving insufficient resources for the remainder of the local unit’s budget?
The ordinance or resolution establishing a charitable fund shall establish an annual credit-eligible donation cap. This is an annual designation of the maximum amount of credit-eligible money the fund may collect and limits the total amount of money a person or entity may donate that may qualify for a local property tax credit. There are no limits on the donations, just on the qualification for a property tax credit.
Can a property owner receive a property tax credit for all amounts paid for one or more charitable funds?
The available local property tax credit funding shall equal 90 percent of the credit-eligible donation cap.
How does a local unit establish the annual credit-eligible cap?
Prior to the beginning of each fiscal year, the annual credit-eligible cap is based on the tax levy from the prior calendar year and may not exceed 85 percent of the prior year budget. When the current-year budget tax levy is certified, the local unit may amend a charitable fund’s credit-eligible donation cap.
Can a property owner receive benefit from amounts paid in excess of the credit-eligible cap?
The ordinance or resolution establishing the charitable fund can include a provision for a spillover fund and shall establish approved uses for the spillover fund. Money in the spillover fund shall be utilized by the local unit solely for the budget year in which the property owner will receive credit
Are there any fees associated with donating to these charitable funds?
Subject to implementing regulations, the local unit shall charge donors a limited administrative fee for the cost of operating the fund. The portion of a donation meant to cover the fee shall not be deductible from the property tax obligation.
Can money collected for the charitable fund be maintained in the tax collector’s account or the main operating account of the local unit?
A charitable fund shall be held in one or more bank accounts in the name of the local unit and shall be kept separate from the local unit’s other accounts. These accounts are subject to the Governmental Unit Deposit Protection Act.
What else can be expected in the implementation of New Jersey’s “SALT” Charitable Contribution Law?
As mentioned previously, the New Jersey Department of Community Affairs and other state agencies must establish implementation regulations. These regulations will address the following issues:
- Tax collection;
- Financial administration;
- Mortgage servicing;
- Property tax relief programs (Homestead Credit and Senior Freeze)
Of final note are Internal Revenue Service considerations. The following statement is from Local Finance Notice 2018-15 published by the Division of Local Government Services in the New Jersey Department of Community Affairs.
The law’s enactment does not guarantee that the Internal Revenue Service (IRS) will consider contributions to local unit charitable funds to be a permitted deduction from a taxpayer’s federal income tax obligation.
On that note, always consult with your tax professional and stay tuned for guidance from the Division of Local Government Services.