State Charitable Giving Incentives
The tax laws in many states encourage individuals to give to charitable organizations whose missions they support by providing an itemized deduction or tax credit. Tax reform efforts in recent years in some states have sought to cap or eliminate charitable giving incentives. Reduction or removal of charitable giving incentives threaten the ability of nonprofit organizations to serve people in need and to continue to strengthen work in communities.
Why it Matters
Limitations on state charitable deductions and other giving incentives effectively remove motivations for donations to churches and synagogues, domestic violence shelters, early childhood programs, food banks, school alumni groups, and all other charitable nonprofits, and would further reduce the ability of charitable organizations to meet the increasing need for services in their communities.
Nonprofit organizations in every state are dedicated to the public good; their work improves lives, strengthens communities and the economy, and lightens the burdens of government, taxpayers, and society as a whole. Maintaining the value of the charitable giving tax incentive is essential to the ongoing work of nonprofit organizations in delivering essential services, enhancing quality of life, and uplifting the spirit of faith, innovation, and inspiration in local communities across America.
If lawmakers truly want effective tax policies and more efficient government, then we also need a thriving charitable nonprofit sector that provides essential services for the people who need them the most.
- Mayor Walter Weeks, Coats, NC, writing in “Senate bill harms nonprofits, communities,” Fayetteville (NC) Observer, April 19, 2015.
Where We Stand
The National Council of Nonprofits is committed to supporting existing, enhanced, and new tax and other incentives at the federal level that encourage individuals to volunteer their time and contribute money to the missions of nonprofits and opposing caps or limits on charitable giving incentives.
Status
The federal Tax Cuts and Jobs Act, enacted at the end of 2017, is generating bills at the state level through which legislators are seeking either to conform state law to the revised federal tax code or to create variances from the federal law. Lawmakers in several states have introduced bills to reduce or limit the expected adverse impact of the federal tax law on charitable giving resulting from the near doubling of the federal standard deduction to $12,000 for individuals and $24,000 for couples. Nationwide, the Tax Cuts and Jobs Act is predicted to cause 28.5 million fewer taxpayers to claim itemized deductions.
Five states (Kansas, Maryland, Minnesota, New York, and Virginia) considered legislation to allow individuals to elect to itemize charitable contributions as deductions on their state tax filings regardless of whether they elected to itemize on their federal tax filings in 2019. A separate Virginia bill would provide a nonrefundable tax credit (capped at $250 individual/$500 couple) to those who do not itemize deductions on their federal tax returns. None of the bills was enacted this session.
Non-itemizer Deductions
During the 2019 legislative session, an Arizona measure would have established a non-itemizer charitable deduction, retroactive to 2018. According to a University of Arizona study, “Arizona nonprofits could lose approximately $273 million in charitable giving” because of the federal tax law. The bill passed the House but stalled in the Senate. More than 250 nonprofits signed onto a letter calling for passage of the giving incentive. Learn more from this op-ed that explains the need and impact of the legislation.
Similarly, lawmakers in New Jersey, currently without a state charitable giving incentive, introduced a bill creating a non-itemizer deduction to allow all taxpayers, regardless of whether they itemize or take the standard deduction, to claim charitable contributions on their tax forms. Specifically, the bill would permit a taxpayer to deduct from state income taxes the amount of charitable contributions made to a “qualified New Jersey-based charitable organization” equal to the amount that is allowable as a charitable deduction under federal income taxes. Lawmakers have called the state charitable deduction “an emergent priority because there are individuals who can reduce their tax burdens and help out charities at all income levels.” The NJ Center for Non-Profits is actively advocating for this type of giving incentive, pointing out, “Demand for the programs and services provided by charities continues to grow, while needed resources lag behind” (as outlined in the Center’s recent report).
If enacted, these states would join Colorado and Minnesota in providing charitable tax incentives for all taxpayers, regardless of whether they take the standard deduction or itemize.
Charitable Giving and Endowments
Whether in response to the 2017 federal tax law or a growing hostility and misunderstanding of the purpose of endowments, the concept of giving to nonprofit endowments is under review is some states in 2019. Tax laws in five states (Iowa, Kentucky, Maryland, Montana, and North Dakota) incentivizing charitable donations via tax credits helped generate increased donations to endowments. Charitable endowments in Iowa have increased sevenfold since the state enacted a giving incentive in 2003. Each state provision is structured differently, with some allowing the benefits to be applied only to gifts to community foundations, while others also allow donations to charitable organizations, including nonprofit colleges and universities. Four legislatures (Colorado, Michigan, Minnesota, and Mississippi) considered similar measures in 2018, each with varying provisions on rates, caps, and qualifications for which nonprofits may receive the donations.
In 2019, the Montana Governor signed legislation to continue the state’s nonprofit and foundation endowment tax credit for another six years, and he Mississippi Governor signed legislation creating the Endow Mississippi Program that grants a 25 percent tax credit for qualified contributions of up to $200,000 to qualified community foundations. Advocacy by charitable nonprofits in North Dakota eliminated legislative threats seeking to weaken the endowment tax credit program in the state. One bill would have diminished incentives by expanding the scope of the endowment tax credit but reducing the amount of the tax credit from $5,000 to $500 at the same time. A separate measure was amended to strip out a provision that changed the endowment and planned gift tax credit to a deduction. In Missouri, a bill sought to target certain nonprofit university endowments by imposing a 1.9 percent tax on the aggregate fair market value of assets, potentially penalizing nonprofits for building reserves to maintain operations into the future.
Charitable Giving and Tax Credits
The 2017 federal tax law capped state and local tax (SALT) deductions at $10,000. Several states responded by passing legislation in 2018 allowing their residents to avoid (“workaround”) that cap by letting state taxpayers treat their payment of state income taxes made to government-run charitable organizations as “donations.” Treasury and the IRS looked to curtail those workarounds in proposed regulations that, however, also appear to apply to many programs in 32 states and the District of Columbia that provide a state or local tax credit for donations to certain charitable nonprofits.
Despite the proposed federal regulations, state policymakers continued to extend, expand, and create state tax credits to incentivize contributions to various nonprofits subsectors. Two states – Georgia and Missouri – enacted or expanded their existing tax incentives in 2018. Bills introduced in Michigan after the proposed regulations were published would have created 50-percent tax credits for charitable contributions to support the work of food banks and donations to community foundations.
In 2019, Georgia continued the streak by extending tax credits to 2024 for donations to rural health organizations. A newly enacted law in Mississippi makes contributions to nonprofits working with Child Protective Services are now eligible for a business tax credit equal to 50 percent with an aggregate cap of $5 million, while an annual aggregate cap for individual contributions has been raised from $1 million to $3 million. A separate bill would have established a tax credit for private school and home-schooling expenses for the taxpayer’s dependent children. North Dakota lawmakers expanded a tax credit for charitable contributions by individuals to nonprofit private schools; prior law had allowed credits only for donations via a partnership or other pass-through entities.
The Indiana Legislature considered a bill that provides a 50-percent tax credit, with caps, for charitable contributions to a public school foundation. Lawmakers in Arizona sought to change definitions for certain charitable tax credits, notably expanding the benefit for donations to charities that provide services to individuals, not just children, with a chronic illness or physical disability. In Iowa, legislators proposed a state tax credit for charitable contributions to regenerative medicine research and an exemption from taxation of wages received by an individual from a nonprofit for services provided to individuals with disabilities.
The ultimate value of these state tax credits depends on federal decisions yet to be announced. The Treasury Department and IRS issued draft regulations in 2018 with the stated goal of the federal proposal is to block state “workaround” laws designed to avoid the new federal $10,000 cap on the amount individual taxpayers can deduct for state and local taxes they paid. As written, however, the proposed rule would apply to most state tax credits, limiting the amounts that donors would be permitted to deduct from federal taxes.
What Nonprofits Can Do
Changes to the charitable giving incentive proposed as part of comprehensive tax reform at the state and federal levels represent major threats to the work of nonprofits in communities. Help protect charitable giving now and in the future by sharing your story with your state association of nonprofits and contacting your legislators to tell them how the giving incentive allows nonprofits to make a positive impact in your community.
Additional Resources
- 2018 Individual Giving Data: What’s the Bottom Line?, Rick Cohen, National Council of Nonprofits, March 20, 2019.
- The Give (by donors) and Take (by taxes) of Nonprofit Funds, Tiffany Gourley Carter, National Council of Nonprofits, March 20, 2019.
- The Effects of 2019 Tax-Policy Decisions Will Linger for Decades. It's Time to Weigh In., Tim Delaney and David L. Thompson, January 14, 2019.
- Contributions in Exchange for State or Local Tax Credits, U.S. Treasury Department and Internal Revenue Service, published August 27, 2018.
- Treasury Issues Proposed Rule on Charitable Contributions and State and Local Tax Credits, Treasury Department news release, August 23, 2018.
- Nonprofits Respond to Release of Proposed Rules on SALT Workarounds, National Council of Nonprofits, news release, August 23, 2018.
- The Lab Results Are in on Tax Reform, Tim Delaney, The Hill, July 23, 2013.
- Tax Reform Lessons Learned From State Experiments, Lisa Maruyama and Tim Delaney, Huffington Post, July 25, 2013.
- Hawai’i Governor Neil Abercrombie’s Testimony, March 15, 2013.
- Letter from Kansas Charitable Nonprofits on the Charitable Giving Incentive, May 31, 2013.
- Nonprofit Association of Oregon’s Testimony on the Charitable Giving Incentive, April 9, 2013.
- Impact on Giving After the Repeal of the Michigan Community Foundation Tax Credit, February 2013.
- Charitable Giving Incentive One-pager, National Council of Nonprofits.
