Can you really deduct property taxes as charitable contributions to avoid the federal cap?

Treasury Secretary Steven Mnuchin called the idea of using charitable contributions to get around the new cap on the deduction for state and local taxes "ridiculous" on Thursday.

But there is tax law that argues it should be allowed. And one agency that could help settle the question, the Internal Revenue Service, is not commenting.

So the issue is getting wider attention since Rep. Josh Gottheimer pitched a plan last week that he said would protect some homeowners from a federal tax increase.

"I've had four Republicans come up to me on the House floor asking how this would work, and could they set it up in their states," said Gottheimer, D-Wyckoff. "Two of them voted for the tax bill."

The plan would work like this: Towns create charitable funds and give homeowners a credit off their property tax bills for all or most of what they donate. The towns would use the donations for the same purposes as property taxes, such as schools and police and snowplows.

The homeowner would pay roughly the same amount. But on his or her federal tax return, the charitable contribution would not be subject to the new $10,000 cap that Republicans in Congress put on the deduction for state and local taxes in the law signed by President Donald Trump just before Christmas.

But can it really be legal to get around the new cap by calling payments for police and schools a contribution to charity? Or is this just an election-year gimmick concocted by Democrats to highlight a potentially unpopular part of the tax law?

Mnuchin made it clear what he thought during Thursday's White House briefing.

"It's one of the more ridiculous comments to think that you can take a real estate tax that you're required to make, and dress that up as a charitable contribution," Mnuchin said. “I hope that the states are more focused on cutting their budgets and giving tax cuts to their people."

But the tax code specifically says that contributions to states and their political subdivisions qualify for the charitable deduction.

Eight university tax law professors published a 44-page paper last week outlining how the IRS and courts have upheld the ability of taxpayers to get a full federal deduction for contributions for school vouchers, open space preservation and domestic violence shelters, even when the contributors got credits or deductions from state and local taxes in exchange.

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So the law distinguishes between the value of a benefit derived from a contribution, such as a public radio tote bag or a meal at an annual charity dinner, and the value of the federal tax deduction derived from a contribution.

But one expert at a Washington think tank said there's a fatal flaw in the plan.

"If the benefit is exclusively for the donor, it violates a bright-line rule," said Jared Walczak of the Tax Foundation. "To be a charitable contribution, it has to have charitable intent and an actual charitable benefit.

"When you put land in easement, the state is gaining a benefit. When someone makes a charitable contribution in lieu of taxes, state has obtained no benefit. It's taxes simply being called by another name," Walczak said.

The IRS could settle the question, but it is not saying anything.

"Since these are proposals, we would not be able to comment on any proposal," IRS spokesman Clay Sanford said Tuesday.

Sanford also could not say whether the IRS would comment once the idea moves past the proposal stage.

Ultimately, the issue could be settled in Congress or court. Congress may pass a "corrections bill" to fix flaws in the hastily enacted tax law, and courts could be asked to weigh issues about competing tax powers of the federal and state governments.

But Gottheimer argues that blocking what New Jersey wants to do could also affect programs in Republican-dominated states that give wealthy contributors tax breaks for donations to charities that fund private school vouchers.

Meanwhile, the mayors of Fair Lawn, Paramus and Park Ridge all said at a news conference with Gottheimer that they would pursue the plan in their communities.

And that raises another question: Should homeowners make contributions while the question is unsettled?

One answer may be that they would not be any worse off. Homeowners who know they are going to lose a part of their tax deduction — and therefore pay higher federal taxes — won't really be hurt if it's because of the $10,000 cap or because the charitable deduction is denied.

But experts advised that people make sure they at least ensure that the issue even affects them now that the standard deduction for married couples has been increased to $24,000. They also said people would want to ensure they get at least the full $10,000 deduction for state and local taxes before making any charitable contributions to cover taxes above that amount.

Contributing: Gregory Korte of USA TODAY