Unlike the federal tax code, which allows taxpayers who itemize to deduct charitable contributions to qualifying nonprofits, New Jersey doesn’t allow residents to write off such donations from their state income taxes. At least not yet.
TRENTON — Legislation to create a New Jersey income tax deduction for charitable donations has been kicked around by lawmakers for over a decade without ever becoming law. But now, thanks to changes in the federal tax law, support is growing, and not just among Republicans.
Unlike the federal tax code, which allows taxpayers who itemize to deduct charitable contributions to qualifying nonprofits, New Jersey doesn’t allow residents to write off such donations from their state income taxes.
Legislation co-sponsored by Senate Minority Leader Tom Kean Jr., R-21st of Westfield, and Sen. Troy Singleton, D-7th of Delran, would create a New Jersey deduction that mirrors the federal one. The only significant difference would be that the state deduction would be limited to contributions to New Jersey-based nonprofits.
The legislation has been discussed in the Statehouse for years but has taken on more urgency because of the federal tax overhaul, which has hit some New Jersey families hard due to the law’s $10,000 cap on state and local tax deductions.
The federal tax law also boosted the standard deduction, creating less of an incentive to itemize and use the federal deduction for donations to charities.
Both issues were cited by Kean and Sen. Paul Sarlo, D-36th of Wood-Ridge, on Monday afternoon when the legislation was considered and advanced by the Senate Budget and Appropriations Committee.
“With the SALT deduction and changes in the federal tax codes, there may be more folks less likely inclined to make these charitable contributions. ... This would help folks here in New Jersey to encourage them to make those (contributions),” Sarlo said.
Kean said state lawmakers can’t restore the federal SALT deduction, but they can help reduce residents’ overall tax burden.
“We need to control what we can control, and the level of the income tax is something we can control,” he said. “This has always been a strong priority for a lot of people on a bipartisan basis, and now it’s an emergent priority because there are individuals who can reduce their tax burdens and help out charities at all income levels.”
The committee advanced the legislation by an 11-0 vote, clearing it for a possible vote by the full Senate as early as next week. To become law, it must be approved by the Senate and Assembly and signed by the governor.
Republicans pushed the measure hard last year as an alternative to a SALT cap workaround that Gov. Phil Murphy and Democratic lawmakers embraced and made law. It authorizes towns, counties and other local governments to create charitable funds that homeowners can contribute to in return for property tax credits equal to 90 percent of what they gave.
The funds are intended to be used to pay for government services normally funded by property taxes. Homeowners who contribute were expected to be able to write off the full amount of those contributions on their federal tax returns because the new tax law kept in place an uncapped deduction for charitable contributions.
But few if any local governments in New Jersey have followed through with creating the charitable funds, in large part because the IRS created regulations to block residents from using charitable contributions as a federal write-off if they received a state or local tax credit in return.
Kean said creating a state tax deduction for charitable giving was a better response to the unpopular SALT cap.
“This is a real solution that helps not only the people who pay the income tax, but also the charities that are helping so many people across the state in different ways,” he said.
In addition to Kean’s bill, lawmakers considered creating a state deduction for charitable donations as part of a 2016 law that raised the gas tax in to provide additional revenues for transportation improvements and repairs. The law also included additional tax changes, such as a small sales tax reduction, the elimination of the state’s estate tax, a boosted tax exemption for retirement income, and a deduction for veterans.
An early version of that bill included the charitable donations deduction, but it was removed during negotiations.
The bill’s chances of reaching Murphy’s desk improved during the current two-year legislative session after it was included among a list of fiscal reforms recommended by the Economic and Fiscal Policy Workgroup, a bipartisan task force of lawmakers, economists and tax experts formed by Senate President Stephen Sweeney last year to review New Jersey’s finances and tax laws.