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Virginia beach tax breaks charity

06 August 2016

Charitable giving is a wonderful thing. You can provide targeted assistance to other members of our society who need a helping hand. It's a cost-effective way to help make the world a better place. It’s such a wonderful thing the government encourages it by providing tax breaks for those who give to charity. If you itemize your deductions, you can subtract your contributions to charity from your taxable income and lower your tax bill. Most of my clients take advantage of that tax incentive and give some money to charities each year.

If you pay state income taxes in Virginia, you get a double bonus. The charitable deductions from your federal tax return also carry over to your Virginia return. Not only do you not pay federal income taxes on the money you donate to qualified charities, but you don’t pay Virginia income taxes on it either.

If you think about it, that’s fairly generous on Virginia’s part. You might be giving money to the Boys and Girls Clubs in San Bernardino, California, and you still get a Virginia tax break for it. The Boys and Girls Clubs of San Bernardino is a worthy charity, I’m sure, but it doesn’t really help any Virginians for you to donate money to charities out of state. You still get a Virginia tax break for it, though.

The fine folks in Richmond recognized this overtly generous situation and decided they wanted to provide a separate incentive to encourage Virginians to donate their money to local (Virginia) charities. What they came up with was a humdinger of a tax credit called the Neighborhood Assistance Program (or the Neighborhood Assistance Act Credit). If you make a contribution to a Neighborhood Assistance Program (NAP) qualified charity you can get up to a whopping 65% Virginia tax credit for your donation.

Let’s look at a quick example to see just how staggering that number (65%) really is:

John and Jane Doe are Virginia residents. Their top marginal federal tax rate is 25%, and their Virginia marginal rate is 5.75%. They give $1,000 to a NAP-qualified charity and are eligible for a 65% tax credit on their Virginia taxes.

  • They save 25% or $250 on their federal taxes
  • They save 5.75% or $57.50 on their Virginia taxes
  • Additionally, they receive a 65% or $650 credit on their Virginia taxes
  • $250 + $57.50 + $650 = $957.50

They gave $1,000 to charity and it lowered their taxes by $957.50. Total cost to them was only $42.50.

How Do I Sign Up?

The NAP is complex, so don’t just start throwing money at a local charity and expect a big tax credit. Virginia makes you work for this, but given how generous the program is I don’t really blame them.

The minimum donation for individuals is $500.  That’s a bit steep for many, but I find quite a few clients who give more than that annually, they just break it up into smaller pieces and spread it throughout the year. If you plan ahead to make one large donation you may be better off in the long run. (Oh, and if you’re interested, the maximum amount an individual can give under this program is $125,000/year. Dare to dream.)

Next you have to find a NAP-qualified charity. The Virginia Department of Social Services posts a list of them every year. YOU NEED TO CONTACT THE CHARITY FIRST BEFORE YOU QUALIFY FOR THE CREDIT. Virginia puts a fixed dollar cap on the available credits, and wants to spread the money somewhat evenly across all of the qualified charities. To help this along they put the charities in the driver's seat. The qualified charities each get a certain value of credits for the year they can award to donors. If you give money to one of these charities, you need to make sure they have credits available to award you for your donation. The list of charities with credits to give comes out in July. You should contact your preferred charity in July to secure your credits. By August many charities are out of credits, but you can probably still find some if you call around.

Once you have verified the organization you want to support has available tax credits, make your donation. You can’t have any strings attached to your donation or receive anything of value from the organization in return. The charity should then provide you with a Contribution Notification Form (CNF) that you fill out and return to them. The charity forwards your CNF to the Virginia Department of Social Services and the VDSS issues you a tax certificate proving you are entitled to the NAP Tax Credit.

When you file your Virginia taxes you include the information about the donation on Schedule CR, and you are done.

Some Additional Things to Know

Virginia puts a fixed dollar cap on the amount of credits they will refund each year. In the event the total credits claimed exceed the fixed cap everyone claiming the credit will see a reduction in the credit. In other words, the credit might only be 60% or 62%, or 58%. You won’t know until all of the credits are counted in Richmond for the year.

The credit is non-refundable. If it takes your total Virginia tax liability down to zero and you still have unused credit, the difference won’t be refunded to you. However, any excess unused credit can be carried forward to the next tax year (for up to 5 years).

You can also give to programs approved by the Virginia Department of Education to receive the NAP credit. Your tax certificate will come from the Superintendent of Public Instruction (vice the VDSS) if you give to an educational charity.

Virginia allows both 501(c)(3) and 501(c)(4) organizations to participate in the NAP. Donations to 501(c)(4) organizations are not deductible from taxes (there are a few rare exceptions), but you would still qualify for the Virginia NAP tax credit. Be sure you know the tax exempt status of the charity you are giving to before you make your donation.

This is a really powerful tax incentive. Virginia wants these charities to receive your money so that it stays at work here in Virginia. I hope to see more people taking advantage of this generous credit next year. If you want more information about the program, please contact me.

 

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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