For most Americans preparing federal Forms 1040, donations made to charitable organizations offer minimal financial benefits, tax-wise. That's because of the raising of the standard deduction implemented through 2018 Congressional change to the tax code (discussed below).
But what about under state law? Are there any states in which philanthropically minded people of average incomes will continue to have a tax incentive to give?
The charitable deduction is not gone from the federal tax code, but it has been rendered mostly useless for all but the wealthiest or most generous taxpayers. The reason is the doubling of the standard deduction that Congress included in its 2018 overhaul of the U.S. Tax Code (the Tax Cuts and Jobs Act, or TCJA).
The standard deduction is now set at $12,000 for people who file an income tax returns as singles and $24,000 for married couples who file jointly. That dollar amount is high enough that the vast majority of U.S. taxpayers have no reason to keep track of and itemize their deductions.
No itemization, no sense tallying up one's gifts to charity—charitable donations are, after all, on the list of potential itemized deductions.
The one exception is found in the Coronavirus Aid Relief and Economic Security Act (CARES Act) of 2020. It was passed by Congress in response to the COVID-19 pandemic, and includes a new universal deduction for charitable contributions. Taxpayers who do not itemize may now deduct up to $300 per year in charitable contributions, on the condition that these donations are made in cash (giving property doesn't count), and to a 501(c)(3) public charity. Contributions to nonoperating private foundations, support organizations, and donor advised funds also don't count.
This federal tax change created a good deal of concern within the nonprofit sector. Early predictions were that charitable giving could be reduced by an estimated $17.2 billion in total per year (according to the American Enterprise Institute, or AEI).
In response, various states have been looking into legislation to create a state-tax based incentive for making gifts to charity. It also happens that some states have separate charitable deduction laws on their books, or basically track the federal code and don't have any disincentives to claim the deduction. Let's look, for example, at California, Minnesota, and Colorado.
See a tax professional for more detailed information.
California law basically adopts the federal standards for tax deductions on gifts to charity. (See California Revenue and Tax Code § 17201.) One important difference is that California has a 50% limitation on charitable contributions based on federal AGI, as compared to a 60% limit under federal law.
Because California's standard deduction is much lower than the federal one, however, taxpayers can, and will want to, itemize their charitable contributions on their California tax returns.
Taxpayers in the state of Minnesota who don't itemize deductions on their federal return can, on their state tax return, reduce the amount of their income that's subject to tax by 50% of their total charitable contributions over and above $500. (See § 290.0132 Subd. 7 of the Minnesota Statutes.)
This is often referred to as the "non-itemizer charitable deduction" or the "charitable contributions subtraction."
Minnesota's law was the first of this kind in the U.S., meant to make charitable giving an attractive option to all taxpayers, not just the ones who itemize on their federal return.
The standards for which types of charitable donations "count" toward the subtraction follow the federal guidelines; Minnesota taxpayers are not, for instance, limited to subtracting contributions to Minnesota-based charities.
Similar to the law in Minnesota, Colorado law (§ 39-22-104(4)(m)) says that taxpayers who have claimed the basic standard deduction on their federal return, and who thus can't benefit from a federal itemized deduction for charitable contributions, can take a subtraction on their Colorado return for the full amount of their charitable contributions over and above $500, limited only by a percentage of their adjusted gross income (AGI). The limitation is 50% of AGI in most cases.
The subtraction means that Colorado taxpayers can literally lower their taxable income from the amount shown on their federal return. See this handy writeup from the state of Colorado.
As in Minnesota, the standards for which donations "count" in this situation track the federal ones.