New federal tax policy could affect AZ charities

For years, tens of thousands of Arizonans have donated money to various charitable and school causes, helping those entities and reaping tax breaks for their efforts.

But a new tax proposal at the federal level could make those actions less inviting.

The U.S. Treasury Department recently issued a proposal that would disallow federal tax deductions on charitable contributions for which donors also receive a tax credit from their states.

In Arizona, taxpayers may receive state tax credits through a half dozen or so popular programs that fund schools and charities and encourage other activities. Those programs will remain.

But if taxpayers no longer can claim a federal deduction as well as an Arizona tax credit, they might think twice before donating — and some non-profit groups have issued warnings.

“Under the new rule, you would be able to claim the state tax credit but not the federal charitable deduction,” said Hands On Greater Phoenix, a Mesabased charity, in a recent email note to its supporters.

A Phoenix non-profit, one.n.ten, alerted donors that “contributions made after Aug. 27 ... will not qualify as an itemized deduction on your 2018 federal income-tax return.”

Essentially, the proposed rule means taxpayers would need to subtract the value of state credits before claiming any federal itemized deductions. The proposal is subject to a public-comment period and possible changes.

However, as noted, charity donations made through Aug. 27 of this year, the date of the proposal, still could qualify for both the federal deduction and state credit, said Ellen Campbell, an enrolledagent tax specialist in Phoenix.

Credits are dollar-for-dollar reductions in the amount of taxes owed, while deductions reduce the amount of income on which taxes are levied.

The Treasury proposal was made in response to efforts by several high-tax states, largely in the Northeast, to create tax-credit programs to fund government-sanctioned social services.

The idea was to help residents circumvent the new $10,000 annual federal deduction limit on state and local taxes. Charity contributions, in contrast, aren’t subject to the $10,000 deduction cap.

The Treasury proposal implied that these “workaround” programs being developed by other states weren’t actual charities but government social-services programs.

At any rate, the new Treasury proposal likely also will affect many Arizonans on their federal tax returns, and Arizona non-profits might see donations drop.

A pro-charity group, the Alliance for Charitable Reform, said the Treasury proposal “failed to distinguish between the tax-avoidance schemes proposed by the (state/local tax) workarounds and credits to legitimate charitable programs.”

Arizona has a handful of tax credits available to individuals that are intended to assist certain charities, provide funding for private-school scholarships, subsidize fees for public-school extracurricular activities, assist military families and so on.

The credits were enacted years ago and will remain in place.

“The Arizona Department of Revenue has completed an initial analysis of the proposed federal tax changes, and the determination is that there will not be an impact on the calculation of the Arizona tax credit on the state tax return,” said Ed Greenberg, a spokesman for the Arizona Department of Revenue.

“At the state level, a taxpayer will still get the dollar-for-dollar credit for donations to qualified charitable organizations, qualified foster-care organizations, public schools and school tuition organizations.”

The intent of the new Treasury proposal is to stem a drain on federal tax revenue by disallowing deductions on payments that, arguably, aren’t really charitable donations but rather contributions that pay for government-sanctioned services in other states.

“Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,” Treasury Secretary Steven Mnuchin said.