Massachusetts Charitable Contributions Deduction Takes Effect
Massachusetts taxpayers are now able to claim a state income tax deduction for charitable donations made in taxable years beginning on or after January 1, 2023. In 2000, Massachusetts voters approved a state income tax deduction for qualifying charitable contributions. The deduction was briefly in effect but was suspended in 2002. Subsequent implementation of this law was delayed until the Commonwealth’s budget improved, and was further delayed due to the COVID-19 pandemic, but has finally taken effect. The state charitable contributions deduction is allowed for contributions that meet the requirements of Internal Revenue Code Section 170 and is available as a deduction against Massachusetts Part B adjusted gross income, even for taxpayers who do not itemize deductions on their federal income tax returns.
The ability to reduce a taxpayer’s state income tax liability may be particularly beneficial in light of the new “Millionaire’s Tax” in Massachusetts. In 2022, Massachusetts voters approved the adoption of an amendment to the Massachusetts Constitution to establish an additional 4% state income tax (surtax) on the portion of a taxpayer’s annual income that exceeds $1 million. This tax, which became effective January 1, 2023, applies to both high earners and those with one-time income in excess of $1 million through, for example, the sale of a home or business. Any income above $1 million will be taxed at a rate of 9%. However, taxpayers can reduce this state income tax by claiming deductions for charitable contributions made during the taxable year, including gifts to “life income” charitable vehicles, such as charitable gift annuities and charitable remainder trusts, with the deduction equal to the amount given in excess of the value of the life income interest received by the donor.
The new charitable contribution incentive this deduction provides is also critical to charitable organizations that rely on donated funds, particularly public charities. Because qualifying as a public charity (as opposed to a private foundation) carries significant advantages, public charities must demonstrate a broad base of public support to preserve their public charity status. The more contributors who donate, even at lower amounts, to a public charity, the easier it is for the public charity to maintain that status. The new deduction is likely to boost philanthropic giving by Massachusetts taxpayers at all income levels, thereby helping charities of all types fulfill their missions and public charities achieve the necessary level of public support.
The new Massachusetts charitable contributions deduction will allow Massachusetts taxpayers to reduce their state income tax liability, even if they would not take a similar deduction on their federal income tax returns. The availability of this state income tax deduction may encourage charitable giving, including life income gifts like charitable gift annuities and charitable remainder trusts (for more information on life income gifts, please see our client alert from January 2023. For those persons with annual income in excess of $1 million who will now be subject to a surtax of 4%, the new Massachusetts charitable contributions deduction may soften the impact of this new “Millionaire’s Tax.”
Meet the Authors
Shannon M. Nelson
Shannon Nelson works with individuals and families on implementing trust and estate planning strategies.