A long-awaited deduction for charitable contributions finally has been reinstated for Massachusetts taxpayers. State legislators are hopeful that the tax benefit, slated for 2021 but sidelined because of the pandemic, will supply an added incentive for taxpayers planning to make donations to nonprofit organizations.
Full-time resident, part-year resident, and nonresident taxpayers can deduct charitable contributions on Schedule Y of their 2023 Massachusetts income tax return. Eligible contributions are subject to the same qualifying parameters as the federal deduction, although donations of household goods and used clothing are ineligible for the Massachusetts deduction.
Clients who are accustomed to taking the standard deduction often neglect to provide their preparers with details on their charitable contributions. However, the Massachusetts deduction doesn’t require a taxpayer to federally itemize their deductions. Tax practitioners should ensure their clients are keeping detailed notes related to what non-cash items they contributed to confirm their eligibility.
Part-year resident taxpayers will be able to deduct their eligible charitable contributions in proportion to their days spent in Massachusetts during the tax year. For example, a part-year resident who spends the first 80 days in Massachusetts before moving out of state would be able to deduct roughly 22% of their charitable contributions that year against Massachusetts income.
Nonresident taxpayers will deduct charitable contributions based on the ratio of their Massachusetts income in relation to their total income. If a nonresident taxpayer earns $80,000 from Massachusetts sources and $400,000 in total, they would be able to deduct 20% of their charitable contributions against their Massachusetts-source income.
The main difference between the federal and Massachusetts rules is that the state deduction can only be used to offset Part B income. Usually, this includes wages, pensions, business income, rental income, alimony, and gambling/lottery winnings. Excluded from this basket of income are interest (except that which is earned from Massachusetts banks), dividends, short-term capital gains (Part A), and long-term capital gains (Part C).
As a result, there currently is no way to use the deduction against the 12% income basket of short-term capital gains. This limits the tax benefit for charitable contributions to 5% at the state level. The excess is carried forward for five years for taxpayers whose deductible contributions exceed their Part B income.
The added state tax benefit for charitable contributions introduces a new layer for taxpayers’ philanthropic endeavors. The deduction, coupled with the new 4% surtax—commonly referred to as the “Massachusetts millionaires’ tax”—can be a powerful planning tool for high-earners. Taxpayers who earn more than $1 million per year potentially can receive a 9% state tax benefit from eligible charitable contributions to the extent they have Part B income. Depending on the circumstances, tax practitioners might suggest high-earning clients do substantial charitable giving in years their income is highest.
Philanthropic taxpayers with multiyear pledges may decide to satisfy more than one year of the pledge amount. Alternatively, the same goal can be accomplished through a donor-advised fund, in which taxpayers receive the deduction upfront and can designate money from the fund to go to specific charities in the future.
The Massachusetts legislature is considering a proposal that would apply the current personal income tax law and administrative provisions to the surtax. As such, until further guidance is issued by the state Department of Revenue, the regulations surrounding how the charitable contributions deduction and the 4% surtax interact are subject to change.
The reinstatement of the charitable contributions deduction in Massachusetts brings a renewed sense of opportunity for taxpayers and nonprofit organizations. With the deduction now available for the 2023 tax year, residents and nonresidents can benefit from the state tax incentive. Although the deduction is limited to offsetting Part B income, the potential tax benefit of 9% at the state level presents a powerful planning tool for individuals.
By eliminating the need to itemize to get the deduction, all charitably inclined taxpayers in Massachusetts should be able to take advantage of this new opportunity. Taxpayers can anticipate a clear path toward leveraging this valuable deduction and making a positive impact within their communities.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Kevin Charles, CPA, is a tax manager at the Colony Group and is responsible for preparing and reviewing tax returns for high-net-worth individuals, trusts, gifts, and foundations.
Adam Davis, CPA, is a tax manager at the Colony Group and is responsible for preparing and reviewing tax returns for high-net-worth individuals, trusts, pass-through entities, and foundations.
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