For most Americans preparing federal Forms 1040 in the year 2019 (and presumably beyond), donations made to charitable organizations will offer no financial benefits, tax-wise. 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 nearly useless. 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 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.
This federal tax change has 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 or proposing legislation to create a state-tax based incentive for making gifts to charity. As of early 2019, however, no states had taken action. Nevertheless, it happens that two states already had such laws on their books: Minnesota and Colorado .
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 its 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.
As in Minnesota, the standards for which donations "count" in this situation track the federal ones.