Monday, November 27, 2017

Charity, State Tax Credits, and Uncle Sam

Everyone have a good Thanksgiving? Us, too.

I always forget how simple it is to make myself happy. All I need is to spend time with the people I love. That's it. Throw in some board games, a plate of good food, and a hoppy beer, and it just feels like cheating. How can I not be happy with all of that, and all those smiling, hugging people around me?

But the reality of work beckons again, at least for a little while. And the possibility of an early retirement seems pretty sweet on Mondays like this, coming back from a too-short vacation.

Still, I'm feeling nothing but gratitude right now. Even for the things that are hard, even for having to wake up on a Monday with a sore throat, even when I'd rather stay in bed. I'm way too lucky to feel too bad.

Last week, I realized I needed to give more, if I'm going to show some gratitude instead of just feeling it. And as someone who gives very little, I'm a novice who doesn't know a lot about it.

There's lots to learn.

For example, it turns out that the state of Arizona gives a dollar for dollar credit, up to eight hundred dollars (per married couple), if you give to a qualifying charity that meets these requirements:

  • "Is exempt from federal income taxes under Section a 501(c)(3) or is a designated community action agency that receives community services block grant program monies pursuant to 42 United States Code Section 9901.
  • Provide services that meet immediate basic needs.
  • Serves Arizona residents who receive temporary assistance for needy families (TANF) benefits, are low income residents whose household income is less than 150% of the federal poverty level, or are chronically ill or physically disabled children.
  • Spends at least 50% of its budget on qualified services to qualified Arizona residents.
  • Affirm that it will continue spending at least 50% of its budget on qualified services to qualified Arizona residents."

That sounds good. But say you want even more tax credits for giving. You can earn an additional $1,000 credit (per married couple) for donations to a qualifying Foster Care Charitable Organization. That's $1,800 in dollar-for-dollar credits (not mere deductions) potentially available for a married couple in our state.

However, this system creates a couple dilemmas.

For one, it forces us to ask whether we think taking money out of the state's budget, and into a charity's, is a net win. As card carrying liberals, Mrs. Done by Forty and I are believers in the merits of government programs, public schools, libraries: you know, all the stuff we love.

But here's the weird part. Since these donations could also be deducted from our income if we itemize our federal taxes (and 2017 will be the first year in which we can), we also could reduce our federal tax bill by our marginal tax rate on top of reducing our Arizona income tax by $1,800.

That is to say, by donating $1,800 dollars, the State of Arizona would ultimately pay that whole amount to the charities out of their coffers, and ,then, Uncle Sam would pay us $450 for the trouble. Somehow, we'd come out ahead by nearly five hundred bucks.

It's a weird situation, and one that feels a bit like cheating.

What do you say, kind readers?

Is this sort of loophole something the Done by Forty household should take advantage of?

Does it even count as giving if we come out ahead?

Even if the IRS didn't provide a second benefit for donations, is it a great idea to take money out of the state's coffers, just to turn around and give it to a charity?

Let's hear it in the comments below.

*Photo is from xddorx at Flickr Creative Commons.


  1. Hmmm... that does sound too good to be true! I guess the question is: what becomes of that money in the state's coffers if it's not given to charity? You'd have to do some research to be sure, but my guess is that they have a budget line item of funds set aside specifically for this purpose, and if it isn't used, it doesn't necessarily go to other departments. Often, when a government doesn't spend it's allocation for a certain line item, it means that less money is allocated for that in the future. It would be worth answering that question - but I sincerely doubt you'd be taking money away from other programs by participating in this one.

    1. Hi Eco Cat Lady,

      So I'm no expert, but I believe that by reducing my state income tax, it would in turn reduce the amount available for a variety of state of AZ programs: Medicaid, Education, stuff like that.

      The same would probably apply to reducing our federal income tax, though the federal government can run a deficit, while our state can't.

      Again, I'm no expert but that's my understanding.

      I think there's a bit of a loophole in that the same deduction has both a state and a federal tax benefit, but there are other areas where that's the same (i.e. - getting both a state and federal tax break for installing solar panels).

    2. Ah, well... you've got a point there. I wasn't thinking of the reduction in the taxes you paid, but rather the matching funds from the state.

      I guess one way to look at it would be that by making a charitable donation you are controlling how those funds are allocated, rather than simply leaving it up to the state government.

      BTW - I haven't studied the Republican tax plan in depth, do you know if it would alter the deduction for charitable giving?

    3. Is AZ really using that money for Medicaid, Education, etc.? Texas just uses that money to do special sessions in order to take women's reproductive rights away or to try to push through anti-Trans legislation. Oh, and to fight lawsuits in favor of bigoted legislation they already knew was unconstitutional when they passed it.

    4. True, there's a lot of bad legislation being created in our state. As a Democrat, I find it hard to love a lot of legislation that is passed.

      But I think of the budgetary realities a state faces are somewhat separate from the legislation they pass, or the legal fees they incur, which aren't a material part of the budget.

  2. Hm. I don't think it's a bad thing to participate just because you also save money / benefit because as EcoCatLady notes, you can't really save the government's money for them, it'll just get allocated to be spent elsewhere, roughly speaking.

    In my book, that's great because then you have the money back in your pocket in some form for you to turn around and give again! I like finding ways to make my money go around a few times, or do many jobs.

    1. That's a neat way of looking at it, Revanche. I suppose we could 'grow the pie' of our donations, so that we actually have skin in the game, too.

      In the example I outlined above, we wouldn't actually be paying anything out of pocket.

    2. I really like this idea.

      Just re-give the $450 you would be up by and there is no moral hazard whatsoever...?

      The fact that these sort of loopholes exist totally bamboozles me though and also why isn't everyone doing it (And if I'm honest I still don't actually understand it, the US tax system seems even more complicated than ours!)!?!? :)

      I don't think I've ever heard of anything similar (that an average person could do so easily at least) in the UK. The best thing we can do is offset charity donations against income to reduce tax bills, not actually come out ahead.

  3. I think you should just pay more taxes. That way you will really be helping out. All jokes aside the assumption that your state or federal government actually manages your tax dollars in an efficient manner that does indeed help everyone is the question you need to ask. At least with your foster care donation you have a little more say in who receives help and that other forms of waste are not benefiting from you r contribution.

    1. Ha! I hear what you're saying and certainly I don't think funds are used efficiently at all levels of government. As someone who cut his teeth in government procurement, I saw the waste firsthand. However, a system can be both inefficient and still be doing good.

      But as you note, it seems we at least have some say of where the dollars go. I think that's the intent of the AZ credit.

  4. I wouldn't lose any sleep over it. Consider how tax dollars are typically spent. Your donation dollars are at least an assured way of getting aid to those who need it, rather than dollars going to guns, sexual harassment settlements, and other follies.

    1. True, a lot of times government spending isn't efficient.

      Of course, the same really can be said for non profits, too. Both orgs have missions that are admirable but the execution may leave something to be desired.

  5. In the Netherlands, I can deduct my charitable gifts from my income tax. Since my highest bracket is 40.5%, that means that when I donate $1000 to a charity, I'm actually donating $595 and the government is donating the other $405. I kind of like that thought. It's like I'm more in charge of what my tax dollars (euros) are doing.

    1. 40.5%! Yeah, when I feel like complaining about our tax rates here, I'm going to come back to this post.

      There is a good feeling that comes from directing your 'tax dollars' to a cause you believe in, for sure.

      By the way, we loved the Netherlands when we visited. Such a great bike culture!

  6. Catching up on my blog reading and read about your giving dilemma. Am reminded of my parents, especially my dad, who gives away 10s of thousands of dollars a year. They've never once deducted this money from their taxes. My dad always says he feels like that's trading, not giving. But he also acknowledges most people don't give otherwise unless it's personal. There is also another form of giving you could consider and it is personal. How about Big Brothers Big Sisters or other such organizations in your area? You may be the inspiration a lonely child needs to excel. Time is more expensive than money and children value your time in wonderful ways. Trust me, if you choose to give this way you may find yourself far more happy with the returns than a few bucks on your taxes. To watch a child learn and grow and discover that there are possibilities never imaginable to them before is truly life changing for you. I'll never forget the day I realuzed that fast food was not a treat for my little, but her everyday diet. After that I taught her to cook and 20 years later she's still cooking. Just something to consider.

    1. Thanks so much for this thoughtful comment, AW.

      We're considering the option of not taking the credit or deduction. Though I admit it's REALLY hard not to just take advantage of this loophole.

      I definitely want to start volunteering time in 2018, too. I need to figure a way to better follow through though.