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Maine Tax Reform & Charitable Giving

by Brenda Peluso

There is confusion about how the recently passed legislation overhauling Maine’s tax code will affect charitable giving.  The new law, which will be in effect for the 2010 tax year, replaces the current system of income deductions with a new system of tax credits.  While this new system potentially reduces the amount of tax benefit a donor would receive from the state, we don’t believe there will be a significant impact on charitable giving in Maine.   The new system still rewards taxpayers who itemize and are generous to nonprofits.

Rob Levin, Esq. recently analyzed the new law and offers the following information:

Summary — Maine nonprofit organizations should be aware that recently enacted changes to the Maine income tax statute will affect their donors’ charitable contribution tax results.  Until now, donations to 501(c)(3) organizations that were deductible on one’s federal income tax return flowed through directly to the Maine income tax return.  However, the Maine Legislature overhauled both the state income tax and state sales tax in Public Law Ch. 382, LD 1495, and this flow-through treatment is altered somewhat.  The new law takes effect starting January 1, 2010.  A complete summary of the law, including changes to the sales tax, may be viewed at Maine Revenue Services home page, www.maine.gov/revenue.  There is a chance that the law will be subject to a referendum due to a challenge by Republicans, but this appears unlikely at the present time. 

Most middle-income taxpayers who itemize their charitable deductions at the federal level will still be able to receive a charitable contribution tax credit at the state level, but this benefit will in most cases be modestly lower.  High-income donors will see less savings from charitable giving, as this credit is phased out gradually as one’s income rises.  However, all is not lost, because a donor who claims a federal charitable deduction above $250,000 in any given year will be able to claim a charitable contribution credit of 5% of the amount over $250,000.  

The net effect of these changes will be to reduce the state-level charitable giving incentive for many, if not most, donors, while at the same time making the overall tax system more equitable.  Lest charities become too concerned, based on my experience, very very few charitable donations, small or large, hinge on the availability or size of Maine income tax savings.  Most donors give because they believe in the organization.  To the extent donors are concerned about tax results, they usually focus on the federal income tax.  Therefore, in my view, Maine nonprofit employees and directors should be aware of these changes, and know enough not to be taken completely by surprise if a donor raises the issue, but they should not feel the need to go out of their way to point out that charitable giving incentives will be reduced.  Unless, of course, they are seeking a reason to land a big gift by the end of 2009, before these reduced incentives are in place!  

Running the Numbers — The bill makes a number of changes to the income tax scheme, among them eliminating the marginal tax rates of 2%, 4.5%, 7%, and 8.5% and replacing them with a tax rate of 6.5%, along with a .35% surcharge on income over $250,000.  In addition, the Maine standard and itemized deductions are repealed and replaced with several new tax credits.  One of these new credits is for charitable contributions of more than $250,000 on one’s federal income tax return.  See § 5218-C.  The credit is equal to 5% of the amount over $250,000.  But it does not include any carryforward amount from donations made in prior years. 

Let’s see how a couple different donors would have fared under the old system, and how they will do under the new system.  First, let’s take Joey, a single man who earns a relatively average income ($45,000/year), donates $2,000 to various charities and has a mortgage interest deduction of $10,000.  He itemizes the charitable donations and mortgage interest on his federal return.  Under the old system, he would have saved $170 ($2,000 x 8.5%) off his Maine income tax return for the charitable deductions.  Under the new system, using the alternate household credit, Joey saves $110 ($2,000 x. 5.5%), a small reduction in savings.  However, don’t feel too bad for Joey, as he is likely to owe less in income taxes due to other changes in the law, such as the lowering of the highest tax rate.  

Next, let’s take Pam, who earns $800,000/year and donates a conservation easement worth $2,000,000 to her local land trust.  Pam can claim a federal deduction of $400,000 (due to a 50% of adjusted gross income limitation) in the first year, and can carry forward the remaining $1,600,000 in deductions over the following four years.  Under the old Maine income tax charitable deductions, Pam would have saved $400,000 x 8.5%, or $34,000 in each of these five years.  Under the new law, she is not eligible for the alternate household credit because her income is so high.   She is, however, eligible for the new charitable contribution credit, under which she will save $7,500 (($400,000 – $250,000) x 5%) in the year of the gift.  But she will not be able to claim any of the carryforward amounts in the following four years.  Looking strictly at the charitable contribution tax results, Pam did much better under the old law.  But again, don’t feel too sorry for her, as she may be paying less in Maine taxes to begin with under the new law.

One thought on “Maine Tax Reform & Charitable Giving

Your statements about the impact of the new law on Maine tax are not correct. In your first example above, you state that a single taxpayer with $45,000 of income that has $2,000 in donations and $10,000 in mortgage interest will have a reduction in Maine income tax and be better off than under the old law. This is not true. Your example does not give the other itemized deductions for this taxpayer, so I have assumed that he will have property taxes of $2,800 and excise tax of $200. Accordingly, this taxpayer has Maine itemized deductions of $15,000. Under the old law this taxpayer’s income tax would be $1,642 and under the new law his income tax increases to $1,788 or a $146 increase in year 2010. In addition, this taxpayer will see a sales tax increase of $95 so his year 2010 tax increase under the new law is $241.

With regard to your second example, once again your statement that this taxpayer will not be hurt because she will benefit from the lower tax rate is false. Assuming that this taxpayer is single and has $20,000 in other itemized deductions and has $800,000 in income each year, her Maine tax under the new law will be $15,033 greater than the old law the first year and will be more than $22,500 a year more for the next four years. Her total Maine income tax increase for the five years under the new law vs. the old law is over $105,000.

I am a retired CPA with over 30 years tax experience and have spend over 200 hours reviewing this new tax law and it is clear that the new law hurts taxpayers with significant charitable contributions. Whether that will have an impact on giving is unknown, but please stop giving out false information on the new tax law. If organizations want to know the truth about this new tax law they can go to http://www.mainedemocratstaxreform.org.

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