2020-2021 Income Tax Charitable Deduction Changes

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By: Keirsa K. JohnsonHemenway & Barnes LLP

Until a few days ago, Massachusetts taxpayers were scheduled to be able to take state income tax deductions for charitable contributions, for the first time since 2001, starting in January 2021.  As a result of the recent budgeting process, however, allowance of those deductions has been postponed until 2022.

History

In 2000, voters approved a ballot initiative to reduce the state’s income tax rate from 5.95% to 5.00% by 2003.  One year after implementation, citing budget shortfalls that forced cuts to essential services, the legislature repealed that change and instead enacted legislation that reduced the income tax rate by .05% each year in which certain economic triggers were met, until the income tax rate hit 5.00%.  As part of that legislation, charitable deductions from income were also suspended until the 5.00% tax rate was reached.  (Notably, that legislation also decoupled the Massachusetts estate tax from the federal estate tax regime.  See TIR 02-18, Tax Changes Contained in “An Act Enhancing State Revenues” and Related Acts.)

Taxpayers with excess charitable contribution amounts in 2001 were permitted to carry those amounts forward five years but, since a 5.00% tax rate was not reached and the charitable deduction was not reinstated by 2006, those deductions were lost.

In December of 2019, the Baker/Polito administration announced that the final rate reduction requirements had been met, that the income tax rate for 2020 would be 5.00%, and that starting in 2021 taxpayers would be able to claim a deduction for charitable contributions.  The deduction was expected to cost the Commonwealth an estimated $64 million in Fiscal Year 2021, and up to $300 million in full fiscal years after that. 

Given the significant budget deficit caused by the COVID-19 response, however, some proposed delaying the reintroduction of the charitable deduction until 2022.  On December 11, 2020, Governor Baker signed budget legislation doing just that.

Looking Forward

When the charitable deduction becomes available (assuming no change to current law), it will be available only to individuals—including “non-itemizers” who take the standard deduction on their federal income tax returns—and will be taken against Part B adjusted gross income.  No deduction will be allowed for the contribution of household goods or used clothing.  G.L. c. 62, § 3.B(a)(13).

Federal Context

The charitable deduction for federal income taxes was also changed for 2020 under the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”).  Under the Tax Cuts and Jobs Act (“TCJA”) of 2017, individuals were allowed to deduct up to 60% of their adjusted gross income for charitable donations of money to public charities.  However, the TCJA also doubled the standard deduction for federal income taxes, all but eliminating the incentive to itemize deductions and capitalize on the charitable deduction for many taxpayers.  The CARES Act, passed in the spring of 2020, includes a $300 above the line deduction for charitable contributions, and also increases the charitable deduction limit for donations of money to public charities (not including donor advised funds) to 100% of a taxpayer’s adjusted gross income for those who itemize.  These changes are only temporary and are scheduled to expire at the end of 2020.  It is yet to be seen whether a similar charitable deduction will be included in any future federal coronavirus relief packages.  If not, the postponement of the state income tax deduction for charitable contributions until 2022 means that Massachusetts taxpayers who postpone 2020 contributions until 2021 may lose a federal benefit with no offsetting state benefit.