The Tax Bill signed into law by President Trump last month will exacerbate many problems in our country from economic inequality to federal deficits to health care disparities and affordable housing challenges. A small silver lining, however, is that it will make the Community Investment Tax Credit an even more powerful tool for many donors and CDCs.
Previously, most CITC donors could fully deduct both their charitable contributions and their state taxes when filing their federal taxes. A CITC donation increases a taxpayer’s charitable deduction, but reduces their deduction for state taxes because he or she is paying less state tax. The net result of this “add back” has been to reduce the value of the federal charitable tax deduction by 50%. Over the past four years, MACDC staff have spent countless hours explaining this accounting complexity to CDCs, donors, and policymakers.
Under the new tax law, the CITC will become more valuable and less complicated – at least for those taxpayers who continue to itemize their deductions. Donors will continue to deduct their entire CITC donation from their federal taxable income and receive the 50% state credit. However, the resulting reduction in state tax liability is unlikely to increase their federal taxable income because the vast majority of taxpayers will still hit the $10,000 cap on state and local tax deductions. The bottom line is that there will no longer be any “add back”.
This is how it will work stating in 2018:
If a taxpayer donates $1,000 to a CITC eligible CDC, they will receive a $500 reduction in state taxes. If that taxpayer is in the 28% federal tax bracket, then they will also reduce their federal taxes by $280. The net cost to the taxpayer will be $220. For a taxpayer in the 37% tax bracket, the net cost of a $1,000 donation will be $130. These calculations assume the taxpayer continues to itemize deductions and pays $10,000 in combined state and local taxes even with their CITC donation.
The change in federal law adds a powerful new argument for why the State Legislature and the Governor should move quickly to expand and extend the Community Investment Tax Credit.
For more information about how the new federal tax law will impact CITC, please contact Joe Kriesberg at MACDC or consult with your own tax advisor.