Charitable Tax Planning Opportunity:  Massachusetts Community Investment Tax Credit

When you are looking for ways to reduce your income tax liability you may want to look into the Massachusetts Community Investment Tax Credit.  This relatively new credit can help you reduce both your Federal and Massachusetts tax liability for certain charitable donations.

Background:

As part of former governor Deval Patricks’ 2012 Economic Development Plan,  He gave the Department of Housing and Community Development (DHCD) instructions on setting forth the process by which Massachusetts Community Development Corporations (CDC) may apply to be classified as a Community Partner and receive an allocation of this new community investment tax credit.

This new Massachusetts Community Investment Credit is available starting January 1, 2014 and running through December 31, 2019.  It is designed to encourage the public sector to donate cash contributions to fund various projects throughout the commonwealth.  The state has authorized $3,000,000 in credits to be awarded to the various individuals and corporations that donate a minimum of $1,000 in 2014 and $6,000,000 in credits for donations exceeding $1,000 in the years 2015 through 2019.

What is a community development corporation? (CDC):

There are approximately 50 CDCs in Massachusetts of which 38 participated the first year this credit was available. They are not-for-profit organizations incorporated to provide programs, activities and services which will promote economic development.  The CDCs focus on providing services to lower income residents or struggling neighborhoods in a specific geographical area.  These non-profit organizations help support the local communities from the fishing industry on Cape Cod, to a food processing center in Franklin County to foreclosed housing in Fitchburg.  The CDC uses the tax allotments to entice donors to give to their organizations.  The donors will receive a tax credit equivalent of 50 % of the amount contributed.

How it works: 

Before a credit can be claimed the DHCD must certify that the taxpayer made a cash contribution of at least $1,000 to a community partner or community partnership fund.  The DHCD will issue an interim certificate to the taxpayer that states the prerequisites to claiming the credit has been met.  The Taxpayer must complete the taxpayer portion of form and forward it to the Commissioner of the Massachusetts Department of Revenue.  The Commissioner will then issue a final certificate to the Taxpayer.  A certificate number must be in the space provided on the Massachusetts Schedule RF Refundable Credits which is attached to the taxpayer’s Massachusetts income tax return in order to claim the credit. There is no credit given for donations under $1,000 and the total amount of the credit claimed per year for a taxpayer is limited to $1,000,000. 

Tax Savings Example

Individual, Itemized

35% Tax Bracket

Federal Tax Effect

Cash Charitable Donation

$10,000

 Estimated Tax Rate 35%

35%

Federal Tax Savings

$  (3,500)

$3,500

MA Tax Effect

Cash Charitable Donation

$10,000

Credit Percentage

50%

Total

$5,000

$5,000

Total Combined 1st Year Tax Savings

$8,500

1st Year Out-of- Pocket Costs

$1,500

 

The credit is a refundable credit but cannot be transferred.  What this means is that the credit will be used to offset the taxpayer’s liability after any other credits have been applied.  The balance will be refunded without interest.

Generally a cash refund of a state credit in includable as income on federal income tax return if the taxpayer receives an actual or constructive payment from the state.  A refund of the credit is includable in Massachusetts gross income to the extent it is includable in federal income.

The taxpayer may elect in lieu of a cash refund to carry over any unused credit for succeeding tax years.  If you elect to carry over the credit you will not be able to receive the refundable portion in a later year.  However it may be beneficial to carry over the unused credit to offset future tax liabilities and prevent the recapture of the cash refund portion as income on your Federal return.

Special provisions:

If you have any unpaid tax assessments, child support payments or other applicable obligations, MA DOR will apply any unused credits and refunds to the outstanding amount.

Limitations for married couples.  The amount of the credit claimed cannot exceed the maximum annual credit of $1,000,000.  If you are both spouses are required to file a Massachusetts return a married filing joint return must be filed in order to receive the credit.  If only one taxpayer is required to file that spouse may claim the credit on the married filing separate return.

Taxpayers with no tax liability or are not required to file in MA must file a return in MA in order to claim the refundable portion of the Massachusetts credit.

Contributions made by a Community Partner and their employees to another community partner will be disallowed.  Also, Contributions where business relationships exist between the taxpayer and the community partner will be allowed only if the cash contribution is not contingent on the contractual relationship.

Specific tax situations vary.  If you are interested learning more about the MA Community Investment Credit and the possible benefits please contact us.  We’ll be glad to help.

Written by Denise Barb

 

References:

830 CMR 62.6M:  Community Investment Tax Credit 

Certified CDC Listings

United Way Community Partnership Fund