Despite IRS Warning, Illinois Senate Approves Federal Tax Workaround

Illinois legislators are trying to help state taxpayers get around limitations in the new federal tax law. But the federal government may negate the plan before it even has a chance to become law.

Most public schools in Illinois get the majority of their funding through property taxes. So it’s a big deal that last year’s big federal tax law put a $10,000 cap on how much of those payments can be deducted.

Photo Credit: Senator Julie Morrison's website

State Sen. Julie Morrison, a Democrat from Deerfield, is sponsoring legislation that would let people make charitable contributions to local schools instead of paying property taxes — meaning such payments could again be deduced from federal taxes.

“This just provides people who pay a lot in property taxes to have that ability," Morrison says.

Her proposal, House Bill 4237, passed the Senate Thursday. It would require counties to authorize local units of government to set up charitable funds for this purpose. Then, any property owner who donated to such a fund would be eligible for a credit on property taxes equal to 90 percent of the donation.

Just this week, the IRS issued a warning suggesting it might not recognize thinly veiled property tax payments dressed up as charitable contributions.

"Despite these state efforts to circumvent the new statutory limitation on state and ocal tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes," the IRS says.

“We’re not certain how the IRS and how courts may look at this, but I think it’s important to have our programs teed up, so that Illinois residents can take advantage of it immediately,” Morrison says.

Similar plans have been rolled out in states like New York and New Jersey, which — like Illinois — have more services paid for with property taxes.