The Arizona Charitable Tax Credit is one of the individual tax credits provided by the state of Arizona. These allow taxpayers to make charitable contributions and receive reductions in their Arizona state taxes owed.
To help you make the most of these tax credits here's what you need to know.
The Arizona Charitable Tax Credit
The Arizona Charitable Tax Credit offers a non-refundable income tax credit for those who make charitable contributions to Qualifying Charitable Organizations (QCOs) and Qualifying Foster Care Charitable Organizations (QFCOs). You can reduce your state tax liabilities by donating to charities and then receive dollar-for-dollar benefits up to the maximum allowable limits. The Arizona Charitable Tax Credit can also be part of your tax focused investment strategies to help keep more of your savings for retirement.
For those married filing jointly, the maximum allowable credit for contributions to QCOs is $800 and the maximum credit for contributions to QFCOs is $1,000. Single filers, as well as those married filing separately or heads of household, have a max contribution credit of $400 and $500 respectively for QCOs and QFCOs.
For example, if you are a single individual and you owe $2,000 in taxes and have donated $400 to a qualifying charitable tax organization, your overall tax liability is reduced to $1,600.
More Choice with Your Charitable Tax Credit
The Arizona Charitable Tax Credit allows taxpayers to choose how their tax dollars are spent. For example, a single taxpayer could make a $400 donation to an eligible Qualifying Charitable Organization and a second $500 gift to a Qualifying Foster Care Charitable Organization. The taxpayer could then claim the maximum allowable credit for these contributions (the $400 maximum tax credit for a QOC and the $500 maximum credit for a QFCO). This would reduce their state tax liability dollar-for-dollar while at the same time $900 went to two charities of their choice.
There is no minimum dollar requirement, any amount donated to a qualifying charitable organization is eligible for the tax credit. If you want to donate $5, you will still receive a $5 tax credit.
Qualifying Donations to QCOs and QFCOs
As a general guideline:
- Individuals may donate (but corporations, foundations, partnerships, etc. do not qualify).
- Only cash donations are accepted (property and in-kind donations, even books and toys, do not qualify, nor do services).
- The Qualified Charitable Organization or a Qualifying Foster Care Charitable Organization must have been certified by the state of Arizona.
Tax Credits vs. Tax Deductions
It is important to understand the difference between tax credits and tax deductions. They both influence an individual's taxes differently and can depend on whether the organization is qualifying or not.
A tax credit:
Is a dollar-for-dollar reduction of an individual’s tax liability. In other words, for every dollar claimed as a tax credit, your overall taxes owed are reduced by one dollar.
For example, if you are a single taxpayer with $40,000 in taxable income and an effective Arizona State tax rate of 3% (just as an example), your Arizona state tax liability would be $1,200. If you donated $400 to a Qualifying Charitable Organization and $500 to a Qualifying Foster Care Charitable Organization, you would be eligible for two tax credits that would reduce your liability by $900. You would then only have to pay the State of Arizona $300 in taxes ($1,200 - $900).
A tax deduction:
Essentially lowers the amount of taxes an individual owes by decreasing taxable income. So, for every dollar claimed as a deduction, overall taxable income is reduced by one dollar.
In this case, if you make two donations of $400 and $500 to different charities but these charities have not been certified by the State of Arizona as either QCO or QFCO, the two deductible gifts would lower your taxable income by $900. So, your taxable incoming would be reduced from $40,000 to $39,100. After factoring in the 3% tax rate (as just an example) your liability would be $1,173. Consequently, you would owe a significantly higher amount to the state of Arizona.
See also our guide on your income tax brackets and why they are constantly changing.
Carrying a Charitable Tax Credit Forward
The Arizona Charitable Tax Credit allows you to carry over any unused credits for contributions to QCOs and QFCOs for five years. However, you may only carry over the proportion of the credit that was unapplied to your previous tax liability. You cannot carry over any amount that exceeds the maximum credit limit.
To illustrate this, say you owe $700 in taxes to the state and contributed $500 to a QFCO and $1000 to a QCO during the last taxable year. To cover your tax liability of $700, you could claim the allowable maximum tax credit of $500 for gifts given to the QFCO and a credit of $200 for gifts given to the QCO. Consequently, these two credits completely cancel out what you owed.
You would still have a credit carryover of $200 from the original $1000 gift (since only $200 of the $400 maximum allowable tax credit for a QCO donation was applied). This means that you can still use $200 for tax credit purposes for up to the next 5 years. However, the remaining $600 cannot be used as a tax credit for any future years.
Arizona Charitable Tax Credits are also non-refundable credits. This means you cannot apply a greater amount of credit than your tax liability. Based on your specific tax situation, you may be eligible for a State tax refund but your tax credits cannot be used to receive money back as a tax refund. (A refundable tax credit however can lower tax liability below zero. So, if a refundable tax credit is more than what you owe in taxes, you may receive the balance as a refund.)
Claiming Your Arizona Charitable Tax Credit
- Donate to a certified charitable organization (QCO or QFCO).
- Keep your receipt.
- Fill out the corresponding tax form(s). (Form 321 if your donation was made to a QCO, and/or Form 352 if your donation went to a QFCO).
- Complete your state tax return and include your charitable tax credits.
Arizona Charitable Tax Credit offers a great way to support the causes you care about while also lowering your tax liability. Be sure to keep good records of your donations. If you have any questions a fee-only financial advisor can help you with your taxes and charitable giving.