Thursday April 25, 2024

1.1.6 State Tax Deductions and Credits

State Tax Deductions and Credits

What is a Tax Deduction?: A charitable income tax deduction is one of the benefits of making a charitable gift.

What is a Tax Credit?: A tax credit is an amount applied after the computation of a taxpayer's tax liability.

There are a number of states that offer tax benefits for charitable giving. This chapter is designed to identify state tax deductions and credits noting relevant state law where applicable.

What is a Tax Deduction?

A charitable income tax deduction is one of the benefits of making a charitable gift. The benefit of a charitable deduction is that it reduces the amount of income subject to income tax by subtracting the amount of the deduction from a taxpayer's adjusted gross income when computing the total taxable income. A deduction differs from a credit in that a deduction reduces the amount of income subject to tax while a credit reduces the total amount of tax owed.

Compliance States

Compliance states permit taxpayers to take the same deductions for charitable gifts that are taken against their federal taxable income and apply these deductions against their state income tax.

These states are: Alabama, Arizona*, California, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky**, Maine, Maryland***, Massachusetts, Michigan, Mississippi, Missouri****, Montana, Nebraska, New Mexico, New York, North Carolina*****, North Dakota, Oklahoma, Oregon, Rhode Island, Utah, Vermont, Virginia and West Virginia.

*Arizona allows itemizing taxpayers a deduction. Non-itemizing taxpayers may use a credit. An individual may claim itemized deductions on an AZ return even if taking a standard deduction on a federal return. For the most part, an individual may claim those deductions allowable as itemized deductions under the IRC.
**Kentucky expands the deductibility for gifts of artwork created by the donor.
*** Maryland taxpayers must reduce their charitable deduction if they also claim the available conservation easement tax credit.
****Missouri allows, in limited circumstances, a fair market value deduction for literary, musical, scholarly or artistic compositions created by the donor.
*****North Carolina allows itemizing taxpayers a deduction. Non-itemizing taxpayers may use a credit.

Restricted Deduction States

Restricted deduction states are those that either allow taxpayers to take a deduction which is less than the federal return allows or use a completely different method from the IRS.

These states are: Arkansas, Colorado, Louisiana, Minnesota, New Jersey and South Carolina.

No Deduction States

Some states do impose income taxes but do not allow donors to deduct the value of the charitable gift.

These states are: Connecticut, Illinois, Indiana, Ohio, Pennsylvania and Wisconsin.

No Income Tax States

Some states do not impose an income tax.

These states are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

What is a Tax Credit?

A tax credit is an amount applied after the computation of a taxpayer's tax liability. The amount of the credit is then subtracted to arrive at the total liability. A tax credit reduces dollar-for-dollar the amount of a taxpayer's tax liability. A credit differs from a deduction in that a deduction reduces the amount of income subject to tax while a credit reduces the total amount of tax owed on the taxpayer's total taxable income.

Charitable Contribution Credits

Most states that provide for charitable tax credits specify particular causes or organizations to which the donation must be made for the credit to apply.

These states are: Colorado, Idaho, Iowa, Kansas, Michigan, North Dakota and Vermont. Credits generally range from 3% to 50% of the amount given to a qualified charitable organization with caps ranging from $100 to over $5,000 for individuals.

Example 1.1.6A

Tommy Taxpayer lives in a state that allows a credit for 20% of the amount given to a qualified charitable endowment, not to exceed $5,000. Tommy gave $25,000 to his local community foundation's endowment this year. Tommy's gift entitles him to a state tax credit of $5,000.

Conservation Credits

Some states allow taxpayers who donate real property or easements on real property to qualified charities to claim a tax credit for all or a portion of the value of the property donated.

These states are: Colorado, Maryland, Mississippi*, New Mexico, North Carolina and South Carolina.

Credits generally range from 25% to 100% of the amount given to a qualified charitable organization with caps ranging from the lesser of tax liability or $5,000 all the way up to over $250,000. Carry-forwards are permissible in every state offering a conservation credit and range from five to 20 years.

*Mississippi allows a credit for the cost of the appraisal required in order to donate a qualified conservation easement.

Example 1.1.6B

Carrie Conservationist donated a parcel of woodlands valued at $100,000 to her state's conservation trust. Her state authorizes a credit for 50% of the fair market value of the land donated. The credit is available up to $250,000 and may not exceed her tax liability in any given year. Any remaining balance may be carried forward up to 20 years. Carrie's state tax liability for the year of her gift was $15,000. Thanks to her credit, Carrie is able to avoid paying any state taxes this year and may carry-forward her unused tax credit of $35,000 for the next 20 years or until it is used entirely, whichever occurs first.

Planned Giving Credits

Some states allow taxpayers who fund a planned gift a tax credit for a portion of the gift. These states are: Montana, Nebraska, and North Dakota.

Credits for Montana and North Dakota are limited to 40% of the present value of the gift portion of a qualified planned gift such as a charitable remainder trust, a charitable gift annuity or a pooled income fund. The credit may not exceed the donor's state tax liability and is capped at a maximum amount of $10,000. Nebraska applies a limit of 15% of the present value of the gift portion of a qualified planned gift such as a charitable remainder trust, a charitable gift annuity or a pooled income fund. The credit may not exceed the donor's state tax liability and is capped at a maximum amount of $10,000 not to exceed the donor's state tax liability. In REG-112176-18 (effective August 27, 2018), the Service published Regulations to limit the benefits of state tax credits for charitable gifts. The Service published final regulations, applying to contributions made after August 27, 2018. The Regulations are meant to curb workarounds on the $10,000 cap for state and local tax (SALT) deductions under the Tax Cuts and Jobs Act (TCJA). Under the regulations, a state tax credit is treated as "quid pro quo" and reduces the federal charitable deduction by the amount of any state or local tax credit reported for the donation. Reg. 1.170A-1(h)(3)(i). North Dakota allows for a three year carry forward of the tax credit. Montana does not have a carry forward provision for its tax credit.

Nebraska applies a limit of 15% of the present value of the gift portion of a qualified planned gift such as a charitable remainder trust, a charitable gift annuity or a pooled income fund. The credit may not exceed the donor's state tax liability and is capped at a maximum amount of $5,000. If a state or local tax credit is limited to 15% of the gift amount, the gift will qualify for a full federal charitable deduction. Reg. 1.170A-1(h)(3)(vi). Gifts generating a state or local dollar-for-dollar deduction do not reduce the federal charitable deduction.

Example 1.1.6C

Philip Philanthropist resides in a state that provides a credit for up to 40% of the present value of the gift portion of a charitable remainder trust. Philip created and funded a CRT with $100,000 earlier this year. The present value of the gift portion equaled $20,000. Therefore, Philip is able to claim a credit of $8,000 ($20,000 x 40%). Because Philip's state income tax liability this year is $19,000 he is able to reduce his total state tax liability to $11,000! If Philp receives a state credit of $8,000, his federal deduction is reduced by the reported $8,000. His federal charitable deduction will be $12,000.

Incorporating Credits in to Your Crescendo Proposals

To include the state tax credit in your donor proposals, verify the amount of credit available from the applicable state by visiting GiftLaw Pro chapter 1.7. Include the amount of the credit on the "Options" tab of your Crescendo proposal. Select the "State Tax Credit" box and enter the applicable amount. The software will automatically include the amount of the credit in the proposal.

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