Breaking the Code: Massachusetts Charitable Tax Deduction
By: Gabriela Nolasco, Tax Associate
For Massachusetts taxpayers, a former tax deduction that was long discussed has finally been revived. All Massachusetts taxpayers should consider taking advantage of this opportunity as it not only helps from a financial standpoint, but it also impacts our communities in a positive way.
This deduction can only be used to offset “Part B” income. This includes wages, pensions, business income, rental income, alimony, and gambling / lottery winnings. The deduction cannot be used to offset investment income (interest, dividends, and capital gains). If there is an excess of charitable deduction limited by “Part B” income, the remainder can be carried forward for five years.
Since short-term capital gains are taxed at 12%, this deduction does not let you utilize the savings against the higher tax rate. However, the 4% surtax which began in 2023 – referred to as “Massachusetts’ Millionaire’s Tax” – could allow philanthropic taxpayers to receive a 9% state tax benefit.
Who qualifies? Any taxpayer: full-time resident, part-year resident, and nonresident taxpayers. Charitable contributions can be deducted on Schedule Y of their 2023 Massachusetts income tax return. For part-year resident taxpayers the deduction is based on the pro rata share of time spent living in Massachusetts. For nonresident taxpayers the deduction is based on the portion of MA income to total income.
Which contributions qualify? The charitable deduction is for all contributions that are typically allowed at the Federal level: cash, stock, donor-advised fund contributions, etc. The MA deduction differs from the Federal deduction in two main ways: 1) Household goods and used clothing are not eligible for the state-level deduction. 2) Taxpayers do not need to itemize deductions at a Federal-level to benefit from the state-level deduction.
What should we do? Keep detailed notes on cash and non-cash charitable contributions throughout the year even if you have not reported this information previously (or when the standard deduction was used previously).
This new charitable contribution deduction in Massachusetts will benefit all taxpayers and can be a powerful planning tool. Please reach out with any questions about your personal tax situation.
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