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Monday, January 27, 2014

Johnston: Give to Charity, Turn a Profit

Tax Analysys Logo (2013)David Cay Johnston (Syracuse), Give to Charity, Turn a Profit, 71 State Tax Notes 225 (Jan. 27, 2014):

Arizona lawmakers let some donors make charitable gifts in a way that makes the donors richer, a trend sure to spread unless Congress stops it.

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Comments

Johnston’s description of this overstates the potential benefits to most taxpayers, because it overlooks the effect of the credit on the itemized deduction for state income taxes. He postulates that a contributor gets both the federal and state benefits of the itemized deduction for charitable contribution. That is true, but a taxpayer who makes a qualifying contribution and receives a 100% state income tax credit will have his or her federal itemized deduction for state income tax reduced by an equal amount, largely nullifying the purported federal tax benefit.

This will not be true for a taxpayer that is subject to the federal AMT, which does not allow the deduction for state taxes but does allow the charitable contribution deduction. The maximum federal benefit for such a taxpayer would be the top AMT rate of 28%. However, a comparatively small number of Arizona taxpayers (about 46,000 out of 2.8 million returns, according to SOI) are subject to the AMT.

One does wonder, however, why a state would want to allow contributors to get back more in state and federal tax benefits than they contribute, even if it is the small universe of federal AMT filers. This problem also comes up in the context of contributions of conservation easements that qualify for generous state tax credits.

Posted by: Joel Michael | Jan 27, 2014 7:58:36 AM

There may be income inequality here, but there is no profit. Draw a T. On the left, write $1,000, the amount of a donation paid out to qualifying organizations. On the right put $1,000, the amount of tax savings achieved. Do you see a profit here? Neither do I.

Take a blank Schedule A. On the line for state income tax, enter $1,000. On the line for charitable contributions, enter zero. Now take another blank Schedule A, and enter zero for state income tax and $1,000 for charitable contributions. Do you see a different total for itemized deductions? Neither do I. Of course, the tax deduction might not be available for AMT. In that case, I suppose there may be some federal tax savings.

Not all of the contributions qualify as charitable contributions. For example, if I donate $200 to the public school where my daughter teaches, for the benefit of a specified student to participate in a specified extracurricular activity, that should not be allowed by IRS as a charitable contribution. (For public schools, money can’t be used for classroom purposes; it only funds extracurricular activities, like sports teams, band and clubs.) But IRS has not done anything to point out this rule, and many taxpayers claim the deduction anyway.

The motive behind the school tax credits originated with legislators of conservative political and religious ideology, wanting to support private schools. These are the Republicans who recently condemned John McCain for being liberal. They are not Catholic, but the major beneficiary of the credit have been the Catholic parochial schools. Tossing a bone to opponents of the $500 private-school subsidy, they also created the $200 subsidy for public-school extracurricular activities.

The motive behind the tax credit for contributions to organizations that help the state’s working poor, was to reduce government programs (and thereby reduce taxes) by encouraging non-government organizations to do the same work, better – and perhaps, to keep the money in the state, rather than sending it to help the working poor in Atlanta or Africa. I donated $200 to Community Legal Services, which will reduce my state tax bill by $200. There may be a psychological profit from this, but I’m still out $200 and my itemized deductions remain the same.

Posted by: Bob Kamman | Jan 27, 2014 8:15:07 AM

I"m amazed that DCJ is published by anyone that cares about credibility. The credit reduces state tax, so it bumps up AGI by the same amount of the deduction. ie, they offset for federal tax purposes.

Posted by: jpe | Jan 28, 2014 8:17:35 AM

("AGI" should've been "taxable income")

Posted by: jpe | Jan 28, 2014 8:18:02 AM

Question - so you wont end up paying state income tax, so wont have that to itemize. But, couldn't you still itemize your state sales taxes?

Posted by: J Dawg | Jan 28, 2014 8:30:11 AM