By Danielle Harrison, CFP
Are you donating money to charitable organizations, but looking for a way to make a larger impact? There are many tax strategies to make your charitable giving go further, but one that is often overlooked is taking advantage of charitable tax credits.
What is a Charitable Tax Credit?
Some states offer individuals and businesses, who make charitable contributions to certain non-profit organizations, tax credits that can partially or fully offset their state tax liability. Currently, over 30 states offer charitable tax credits. These tax credits are for a predetermined percentage of the donation made to a qualified charity and commonly equal 30 to 70% of your donation amount, but some can be as high as 100%.
Charitable tax credits come in two forms: those that are directly offered by the state and those that are allocated to non-profit organizations who then make the tax credits available to their donors.
Many states offer charitable tax credits directly to taxpayers who donate funds to an organization that meets certain requirements. My home state of Missouri makes several of these tax credits available, including the Food Pantry Tax Credit, which “provides a tax credit for taxpayers who make donations of cash or food supplies to a qualified local food pantry, homeless shelter, or soup kitchen.” Another is the Champion for Children (CFC) Tax credit that “provides a tax credit for contributions made to CASA, child advocacy centers, or crisis care centers.”
The state typically has a set number of credits allocated for each program annually. If credits are claimed by donors in excess of these figures, the tax credits will be distributed pro rata.
States may also allocate tax credits to charitable organizations for specific projects who in turn make the tax credits available to their donors. Non-profit organizations can apply for these credits to help incentivize donors to make contributions to their organization. In Missouri, there are many different tax credit programs that a non-profit organization can apply to which are administered by different state government agencies such as the Department of Revenue, Department of Social Services, and the Department of Economic Development. Charitable tax credits offered through non-profit organizations are often granted on a first-come, first-serve basis and have a deadline based on the particular project the non-profit applied for.
How Can Charitable Tax Credits Make My Charitable Giving Go Further?
Charitable tax credits lower your tax liability dollar-for-dollar. They are often more advantageous than charitable tax deductions which only lower your taxable income, decreasing your tax liability by the amount of your marginal tax bracket.
It is important to note that in order to receive a charitable tax deduction—excluding the $300 per taxpayer above-the-line deduction in 2021 due to the Coronavirus Relief Bill—a tax filer must itemize their deductions. In most instances, you do not have to itemize your deductions to take advantage of charitable tax credits. This is a substantial benefit since, following the Tax Cut and Jobs Act of 2017, approximately 90% of tax filers take the standard deduction rather than itemizing and therefore cannot deduct their charitable contributions.
Say you make a charitable donation of $10,000 and are in the 24% marginal tax bracket. By taking a charitable tax deduction, you would save $2,400 in taxes if you itemized your taxes that year. Now if that organization offered a 50% charitable tax credit for contributions, you would save $5,000 in taxes.
There is the possibility to save even more if you are also able to itemize some of these contributions and take a tax deduction in addition to the charitable tax credit. Combining the deduction and credit can be done in certain instances. It is advised to talk with a knowledgeable accountant or financial advisor who knows your particular situation to determine whether you qualify for this additional tax savings.
Anything else I should know about Charitable Tax Credits?
There are several things you should be aware of before taking advantage of charitable tax credits. First, ensure you are eligible to receive the credits. Some credits are only available for individuals, others just for businesses, and some both. Also, be clear on any minimum contributions you must make in order to receive the charitable tax credit, as well as the maximum amount.
Be aware of the deadline by which you must make the contribution. As noted above, for non-profits who applied for tax credits, they are often allocated to donors on a first-come, first-serve basis with a deadline based on the project the non-profit applied for. For donors participating in the credits directly from the state, there is commonly a December 31st or April 15th deadline and any tax credit claimants during a specified time period will be eligible for the allotted tax credits. They will often be divvied up pro rata if there are more claimants than available tax credits.
In most instances, cash is an acceptable donation to qualify for charitable tax credits but other items such as stocks, property, and even food can sometimes be considered an eligible donation. Verify eligibility by reviewing the pertinent tax forms or contacting the non-profit agency offering the credits.
Most state tax credits are not refundable, meaning if they exceed your state tax liability for the year you are unable to receive a tax refund for the excess. In many instances though, you are able to carry any excess credit forward to subsequent tax years. Be sure to understand how many years the excess can be carried forward as this can vary.
Interested in utilizing tax credits to make your charitable giving go further? After ensuring you live in a state that offers charitable tax credits, the first step is to either contact the charities you are passionate about to see if they have any available or search your state’s Department of Revenue website for any tax credits they offer. You can also check with your accountant or qualified financial advisor. As a financial planner who works with charitable individuals, I am often aware of charitable tax credit opportunities. In my local area, in addition to those that are offered directly by the state, organizations such as Columbia Center for Urban Agriculture, First Chance for Children, and Great Circle all currently have tax credits available to donors.
Once you’ve determined where your donation will go, I highly suggest that either you or your advisor works directly with the non-profit organization to ensure your donation will be eligible and that you follow the exact process needed to receive the tax credits.
About the author: Danielle R. Harrison, MBA, CFP®, CFT-I™
Danielle R. Harrison, MBA, CFP®, CFT-I™, is the founder and president of Harrison Financial Planning, a fee-only financial planning firm based in Columbia, Missouri and equipped to work with clients across the country. Harrison Financial Planning provides comprehensive financial planning and investment management and is there to help guide clients through any financial decisions that arise. Harrison Financial Planning specializes in working with busy professionals and retirees who enjoy giving back through their profession, volunteerism, or charitable giving.
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