Charitable Giving Caught in Crossfire

Last month, the U.S. Treasury quickly passed new rules that will block states with high state taxes attempt to work around the SALT (State and Local Tax) deductions cap. This new rule has a collateral damage impact on states that promote charitable contributions by providing state tax credits, which until recently did not reduce the amount of deductibility on your federal taxes. If you have been receiving state tax credits on your charitable contributions, you may want to speak with your tax professional or review your strategy to make sure you are not surprised when you file your taxes next spring.

SALT Caps

At the end of 2017, major tax reform was passed. The tax reform had sweeping benefits for most tax filers, but one pain point for some was the $10,000 cap on state and local tax deductions. This cap greatly impacts those who pay high state tax and/or property tax. There are a handful of states that are the most impacted and felt that their citizens were inappropriately sacrificed. These states began to formalize workarounds, which utilized charitable contributions in lieu of state tax because the $10,000 cap is not a limit on charitable contributions.

Charitable State Tax Credits

Maybe you have benefited from charitable state tax credits in the past and did not quite understand how they worked. The credit benefit of your contributions varies by state, but the federal treatment was always the same. In the past, the federal tax treatment of your charitable contributions was not impacted by whether you received state tax credits. You would always recognize the full deduction if you itemized on your federal taxes. I will use Colorado’s Child Tax Credit as an example: Tax Bracket Assumption for both examples below:

24% Marginal Rate

$5,000 Charitable Contribution

Pre-US Treasury Ruling   Post- US Treasury Ruling  
50% State Tax Credit $2,500 benefit 50% State Tax Credit $2,500 benefit
100% Fed Tax Deduction $1,200 benefit 50% Fed Tax Deduction $600 benefit
Total tax benefit $3,700 Total tax benefit $3,100
Net out of pocket $1,300 Net out of pocket $1,900

The difference between the two examples is $600 or a 46% difference than the pre-US treasury ruling.

You can see that the impact to your situation will be proportionate to the amount that you contribute, as well as, the percentage of state tax credit you receive. Some states have programs where you actually receive a credit up to 100% of your contributions, which now would completely negate a federal tax deduction.

Final Thoughts

Realistically, the new calculation makes the most sense. The biggest issue, however, is that the ruling was rushed through and was not necessarily meant to target “normal” charitable contributions, but to thwart states attempting to find their way around the SALT caps. The SALT caps initial pain has now spread to impact additional tax filers outside of the previous targets of high state tax and property taxpayers. Most of the charitable organizations and CPAs I have spoken with do not feel that these changes will not likely have a huge impact on charitable giving, even if the tax benefits have been reduced. Their thought process is that those who are charitably inclined do so more because of the causes they care about and are less motivated by tax benefits.

Published: Oct 19, 2018

Tags: Guest Financial Planning Taxes Giving


Lucas Casarez

is a Certified Financial Planner™ and lives with his wife and son in Fort Collins, CO. He launched his firm, Level Up Financial Planning, to create access to true financial planning for Gen X/Y families in tech. Lucas believes that serving this market greatly increases his impact on the lives of his clients than when he was at a traditional firm that limited him to working with those who already had strong financial habits and greater than $500,000 retirement assets. To find out more about Lucas or Level Up Financial Planning visit his website. www.levelupfinancialplanning.com