Earlier today, in East Rutherford, Governor Murphy signed S-1893, which permits municipalities, counties and school districts to establish one or more charitable funds, each for a specific public purpose, and permits property tax credits in association with certain donations. This legislation is a response to new Federal Income Tax cap on the SALT property tax deduction.
The charitable fund must have a specific public purpose that is more limited than the general purpose of the municipality. The purpose must be described in publicly available documents and records. For a municipality to establish a charitable fund it first must adopt an ordinance creating the fund for a specific public purpose of that municipality. The ordinance:
- Must designate the official serving as the municipality’s custodian of public funds to serve as the fund administrator;
- Must establish an annual credit eligible donation cap;
- Must limit the total amount of money a person or entity may donate that qualifies for local property tax credit, that is, a cap on the total credits that a taxpayer can earn;
- Must establish an initial annual credit eligible donation cap, that is, a cap on the total that each charitable fund can collect; and
- May establish a spillover fund.
The annual credit eligible donation cap is a cap on the total value of local charitable donations that are eligible for a local property tax credit. This is the maximum amount of credit eligible money the fund may collect. The annual credit eligible donation cap must be established prior to the beginning of each fiscal year based on the tax levy from the prior calendar year. The annual cap cannot exceed 85% of the prior year’s budget unless otherwise authorized by the Director of Division of Local Government Services (DLGS). For 2018 the cap must be established on the date on which each charitable fund begins accepting donations. It is important to note that the donation cap is not construed to limit all donations just donations that are property tax credit-eligible.
The spillover fund, which may be established, temporarily holds donations that have reached their annual credit eligible donation cap to a given fund. The spillover must be administered by the fund administrator of the charitable trust. The ordinance establishing the spillover fund must designate approved uses for the spillover funds that must be remitted by the spillover fund upon appropriation of the governing body. Approved uses include, but are not limited to, payment of debt services, funding of capital reserves, reserve for uncollected taxes, emergency expenses, and operating expenses. Funds in the spillover fund must be used solely for the budget year corresponding to the year in which the taxpayer will receive the credit.
The charitable fund must be held in the name of the municipality in one or more bank accounts and are governed by the Governmental Unit Deposit Protection Act. It cannot be administered jointly by more than one local unit.
The funds in the charitable fund are equivalent to tax revenues for the purposes of State aid formula, revenue calculations, bonding capacity, and similar State or municipal computations. The funds must be available immediately to the establishing local unit upon request of the fund administrator for the payment of budget and emergency mandatory expenses, including debt service.
The fund administrator, who is the local unit’s custodian of public funds, is responsible for the collection, administration, and distribution of donations dedicated to the fund. They must continually track the total of all qualified donations with respect to the fiscal year. The DLGS Director may adopt rules requiring additional or supplemental bonding for the fund administrator.
Any person or entity, regardless of property ownership or location of residence, may donate to the charitable fund by directing payment to the fund administrator. The person must indicate at the time of the donation the specific property to which the donation applies for credit. Please note that a donation may be credited to more than one property, however, the property owner must indicate the amount of the donation intended to be applied to each property.
Following the receipt of a local charitable donation, the fund administrator must:
- Issue a receipt to the donor – confirming donation amount and the property associated with the donation;
- Notify the donor that, in the event that the annual credit eligible donation cap has been reached, the donation will be held by the local unit in escrow. The donor has 60 days, unless a lesser timeframe is specified by the DLGS Director, to direct the fund administrator to allocate the donation to another charitable fund established by the local unit or rescind the donation. If the donor fails to notify the local unit within the established timeframe, then the funds are transferred to the spillover fund. If no spillover fund is established the funds are returned to the donor; and
- Notify the municipal tax collector and chief financial officer or business administrator within 5 business days of the amount of the donation and credit made as a result of the donation. Thereafter, the tax collector must notify the donor of the amount of the available local property tax credit. Please note that only local charitable donations made to the charitable fund established by the local unit are eligible for credit on a property tax bill.
Charitable donations must be used for the following purposes:
- For the purpose designated by the local unit;
- Payment of any administrative fees of the municipality that may be required by the municipality to meet the requirements of this law; and
- The remaining funds used in a manner consistent with the specific charitable purpose.
For fiscal years beginning on or after January 1, 2018, the tax collector must allow local property owners credit to be applied to property taxes. The credit shall be equal to 90%, or a different percentage as determined by the DLGS Director, of the amount of local charitable donations contributed, on behalf of the owner’s specified local real property, to a local unit’s charitable fund. However, no credit can be issued to any owner of a local real property if the owner owes local property taxes or other delinquent municipal charges at the time of donation.
On or after the fifth (5) business day following receipt of fund administrator’s donation notification, the tax collector shall apply the credit against the first local property tax bill that is charged. However, each municipality must impose a deadline by which the fund administrator must supply the tax collector and chief financial officer with all donation amounts received and the amount of credits made available as a result of those donations, in order for the credits to be applied to the next annual property tax bill. Subject to the pending rules, the municipality has the sole discretion as to whether to establish a deadline by which donations made to a charitable fund may be credited against an annual property tax bill that has already been issued. In that case, the property taxpayer must be given access to a statement showing how the credit has been applied.
If the total amount of all local property tax credits available for a specific local property exceeds the property taxes due during the year in which the donation was made, and the tax collector is unable to apply all or portion against the bill, the tax collector must carry the remaining portion of the credit forward to one or more future bills. Tax credits can only be carried over for five (5) years from the date of the first local property tax bill after the donation was made. No cash refund of property taxes can be issued until the amount of the property tax refund due exceeds the amount of tax credit issued for the property.
The tax collector must indicate on the property tax bill the value of tax credits applied to the current bill and value of tax credits available for future bills. The tax credit is applied to the parcel of property and not an individual person or entity. The law also requires the property tax bill to include the value of the tax credits that apply to the bill and the value of tax credits that apply to future bills.
Please note that no mortgagee or servicing organization is entitled to hold a local property owner liable for electing to meet their obligation to a local unit by means of a charitable donation and resulting property tax credit.
The law gives rulemaking authority to the State Treasurer, the Director of the Division of Taxation, the Commissioner of Banking and Insurance, the Commissioner of Education and the DLGS Director. The rules adopted by the DLGS may include provisions to:
- protect local units against the loss of property tax revenues that may apply to a local unit due operation of the property tax levy cap attributable to receipt of charitable donations;
- establish procedures for management of the charitable funds;
- establish appropriate timelines to coordinate various responsibilities of fund administrators and tax collectors;
- provide guidance to tax collectors as to when a tax bill is deemed assessed;
- provide guidance as to how servicing organizations shall implement the election of a local property owner to meet their obligations and obtain resulting local property tax credits, including, but not limited to, provisions for notice to the servicing organization of credits;
- adjust the percentage of the annual credit eligible donation caps;
- establish standards for implementing local property tax credits for qualified charitable contributions toward a school district-established charitable fund, where the municipality defers a portion of the school levy tax; and
- harmonize, to the extent necessary, the provisions of this law with the Local Budget Law and Local Fiscal Affairs Law.
The rules adopted by the State Treasurer may include guidance on how qualified donations impact the “Homestead Property Tax Credit Act”, the “Property Tax Deduction Act”, and the homestead property tax reimbursement program.
Please note that nothing in this law will prohibit a municipality or county from accepting bequests, legacies, or gifts pursuant to N.J.S.A. 40A:5-29 or any other legal authority.
The new law will take effect on July 3, 2018. The state is in the process of drafting rules to implement the law. We will continue to keep you posted.
Contact: Lori Buckelew, Senior Legislative Analyst, email@example.com, 609-695-3481 x112.