What is the Arizona Charitable Tax Credit?

The Arizona Charitable Tax Credit is a set of two nonrefundable individual income tax credits for charitable contributions to Qualifying Charitable Organizations (QCOs) and Qualifying Foster Care Charitable Organizations (QFCOs). The maximum allowable credit for contributions to QCOs for married filing jointly is $800 or for single, married filing separately, and heads of household filers, the maximum is $400. The maximum credit for contributions to QFCOs is $1,000 for married filing jointly or $500 for single, married filing separately, and heads of household filers. These tax credits provide dollar-for-dollar tax benefits, allowing taxpayers to reduce their state tax liabilities for each dollar donated to charities, up to the maximum allowable limits.

Guidelines for the Arizona Charitable Tax Credit

The following are general guidelines for using the Arizona Charitable Tax Credit. As always, please consult your accountant or tax advisor for advice on your specific tax situation.

• Donations must be made by individuals (corporations, foundations, partnerships, do not qualify).
• Donations must be made in cash (property donations do not quality, nor do in-kind donations such as toys, books and services).
• Donations must be made to Qualified Charitable Organizations or Qualifying Foster Care Charitable Organizations that have been certified by the state of Arizona; gifts to non-certified charities are not eligible for the AZ Charitable Tax.

How Does the Arizona Charitable Tax Credit Work?

The process for making a charitable contribution and claiming the Arizona Charitable Tax Credit is relatively straightforward. There are four (4) steps to document your donation and claim your tax credits.

1. Donate to a certified charitable organization (QCO or QFCO), such as a 501(c)(3) organization like Mary's Food Bank.
2. Maintain a receipt of your gift from the charity, in order to provide a copy with your tax
3. Complete the relevant tax form to claim one or more credits for your gift(s): Arizona Form 321 for gifts to QCOs, and/or Arizona Form 352 for gifts to
4. Calculate your individual tax return (e.g. Arizona Form 140, 140NR, 140PY or 140X), subtracting your tax credits from your tax liability, in order to reduce your Arizona state tax Include either Arizona Form 321 or Arizona Form 352, or both, with this return.

For example, if a single individual owes $2000 in taxes but donates $400 to a qualifying charitable organization, his tax liability is reduced to $1600.

Donate, maintain your documentation, complete the relevant forms, and calculate your tax credit against your tax liability.

Utilizing the Arizona Charitable Tax Credit through Payroll Withholding

Are you interested in an easier way to give to your favorite qualifying charity? On both Arizona Form 321 and Arizona Form 352, you are permitted to record charitable contributions made through payroll withholding, provided that your employer is able to withhold contributions to eligible Arizona Charitable Tax Credit organizations from your pay. Be sure to contact your employer prior to setting up donations through payroll withholding.

How the Arizona Charitable Tax Credit Shifts Control to Taxpayers

The Arizona Charitable Tax Credit gives taxpayers more choice in how their tax dollars are allocated. Consider the example of a single taxpayer who makes a $400 donation to an eligible Qualifying Charitable Organization, and a second $500 gift to a Qualifying Foster Care Charitable Organization. The taxpayer then claims the maximum allowable credit for these contributions (the $400 maximum tax credit for a QOC, and the $500 maximum credit for a QFCO), reducing his/her state tax liability, dollar-for-dollar. This taxpayer has effectively redirected $900 of his/her State tax payment from the State’s general fund to the two charitable organizations of her choice. This is the underlying benefit of the Arizona Charitable Tax Credit – it shifts control away from the State and gives individuals the power to determine which deserving organizations will receive tax revenue. Taxpayers themselves can direct tax dollars to charities whose services they believe provide the most value to their local communities. This program grows in popularity each year—and for good reason. The impact on the community continues to increase; according to the Arizona Department of Revenue (ADOR), in tax year 2017 over 165,000 Arizona residents contributed more than $68.5 million to qualifying charities.

AZ Tax Credits vs. AZ Tax Deductions

This is often misunderstood, so let’s clarify. There is a distinction between tax credits and tax deductions. Credits and deductions differ in how they impact an individual’s tax obligations. A tax credit reduces an individual’s tax liability (or the total amount of tax debt owed to the government) on a dollar-for-dollar basis. For every dollar an individual claims as a tax credit, her tax obligation is reduced by a dollar. In contrast, a tax deduction reduces an individual’s taxable income. For every dollar an individual claims as a tax deduction, their taxable income is reduced by a dollar. Based on the calculation from his/her income bracket, the individual pays a tax on the amount left over after deductions are subtracted. Consider the example of a single taxpayer with $40,000 in taxable income and an effective Arizona State tax rate of 3 % (this rate is just used for the purposes of an example; current Arizona state income tax rates can be found on the IRS website). In this case, the taxpayer’s Arizona state tax liability is $1,200 (3 % of $40,000). Now let’s assume this individual has donated $400 to a Qualifying Charitable Organization and $500 to a Qualifying Foster Care Charitable Organization; then she takes the $400 maximum allowable tax credit for a gift to a QCO, and the $500 maximum allowable tax credit for a gift to a QFCO. In this scenario, these two tax credits would reduce the individual taxpayer’s liability by $900 ($400 +$500), from $1,200 to $300. The individual would end up paying $300 to the State of Arizona. Now let’s consider the implications of two equivalent tax deductions for the same taxpayer. In this example, assume the individual makes the same two donations of $400 and $500, except in this case the gifts are made to two charities that have not been certified as either Qualifying Charitable Organizations or Qualifying Foster Care Charitable Organizations by the State of Arizona. In this scenario, these two tax deductible gifts would reduce the individual’s taxable income by $900 ($400+ $500), from $40,000 to $39,100. After applying the 3% effective tax rate to the individual’s $39,100 of taxable income, the individual taxpayer’s liability would be $1,173, resulting in a higher payment to the state of Arizona.

The Working Poor Tax Credit

History lesson: the tax credit for gifts to Qualifying Charitable Organizations dates back to 1998 and used to be called the “Working Poor Tax Credit.” In the tax year 2012, the credit grew to include charities that provide for needy families, children with chronic illness or physical disability, and Arizonians that qualify as low income. Now, this credit is part of the “Arizona Charitable Tax Credit” umbrella term that is used to describe the tax credits for gifts to both QCOs and QFCOs.

Limits to the AZ Charitable Tax Credit

What is the Maximum Allowable Credit?

As noted above, the maximum allowable credit for contributions to QCOs for single taxpayers, married (filing separately) filers or heads of households is $400; for joint taxpayers, the maximum credit is $800. And to recap, the maximum credit for contributions to QFCOs for single taxpayers, married (filing separately) filers or heads of households is $500; for joint taxpayers, the maximum credit is $1,000. Other Arizona tax credits have similar limits, and these are outlined later on in this article.

Minimum Dollar Requirements for the Arizona Charitable Tax Credit

Donors often wonder whether they can receive tax credits under the Arizona Charitable Tax Credit for smaller gifts, especially when they want to support a charity but are not able to donate hundreds of dollars. To clarify, there is no minimum dollar requirement for the Arizona Charitable Tax Credit. Charitable contributions to QCOs and QFCOs do not have to exceed a minimum dollar threshold. A single taxpayer who wants to contribute $400 to a QCO and claim the maximum allowable credit may do so; likewise, a taxpayer can make a $5 donation, record this gift on Arizona Form 321, and receive a tax credit in the amount of $5 from the state of Arizona.

Five Year Carry Forward Period

The Arizona Charitable Tax Credit permits any credits for contributions to QCOs and QFCOs that are not applied against tax obligations for the most recent taxable year to be carried forward for a period of five consecutive years. However, the instructions for Arizona Form 321 and Arizona Form 352 both contain an important, identical caveat: “You may carry over only that portion of the credit that you do not apply to tax. You cannot carry over any amount that you gave that was more than the maximum amount allowed as a credit.” Let’s clarify this limitation with an example. Consider the case of a single taxpayer with an Arizona state liability of $700, who had contributed $500 to a QFCO and $1000 to a QCO in the most recent taxable year. In order to offset their $700 tax liability, this individual may claim the $500 maximum allowable tax credit for a gift to a QFCO and a $200 tax credit for the QCO gift (remember, the maximum allowable tax credit for a gift to a QCO is $400, so this is within the limit). Since these two credits completely offset the $700 tax owed, the taxpayer now owes the state of Arizona nothing ($0). But what about the remaining $800 from the QCO gift ($1000 minus the $200 tax credit that was applied)? In this case, the individual has an available credit carryover of $200, since only $200 of the $400 maximum allowable tax credit for a QCO donation was applied against her current tax liability. This remaining $200 tax credit may be used for the next tax year. The remaining $600 of the original $1000 gift ($1000 – $200 tax credit – $200 credit carryover) may not be used as a tax credit for the most recent tax year, nor may it be used as a tax credit in any future years.

Arizona State Tax Credits Cannot Exceed a Taxpayer’s Current Tax Liability

You may have noticed from the example above that the taxpayer did not use the $200 tax credit carryover to generate a tax refund for the most recent tax year. This is due to another limitation that is spelled out in the instructions for both Arizona Form 321 and Arizona Form 352, which state, “because this is a nonrefundable credit, the total amount of available credit [current year plus any valid carryover amount(s)] that a taxpayer may use for the taxable year cannot be greater than the tax liability shown.” Put simply, this means that tax credits from the Arizona Charitable Tax Credit can only be applied up to a taxpayer’s current Arizona state tax liability. The tax credits cannot be used to receive money back from the State of Arizona. Of course, based on your specific tax situation, you may still be eligible for a State tax refund, so be sure to consult with your tax advisor for advice on your specific tax circumstances. By comparison, “a refundable tax credit can reduce a taxpayer’s tax liability to below zero, which means if the amount of a refundable tax credit is more than the amount of taxes due, the difference will be paid to the taxpayer as a tax refund,” according to the Arizona Department of Revenue.

Arizona Standard Deduction Adjustments

In 2019, the passage of Arizona HB 2757 introduced adjustments to Arizona's standard deduction amounts, aligning them with the federal standard deduction. For single and married (filing separately) taxpayers, Arizona's standard deduction was increased to $12,200, from $5,312 -- a 130% increase. For head of household filers, Arizona's standard deduction was raised to $18,350, from $10,336 (up 78%). And for married (filing jointly) taxpayers, Arizona's standard deduction was boosted to $24,400, from $10,336, a whopping 136% hike. To allay fears that increasing Arizona’s standard deductions could curb charitable giving, The ADOR says that Arizona HB 2757 stipulates “the Arizona standard deduction can be increased by 25 percent of the charitable deductions the taxpayer would have claimed if they had itemized their deductions.” This increase ensures that taxpayers who would have otherwise donated and claimed those gifts while itemizing their tax deductions will still be incentivized to make charitable contributions.

Eligible Charity Organizations for the Arizona Charitable Tax Credit

The Arizona Charitable Tax Credit is meant to provide taxpayers with a mechanism for supporting charities that offer services to low-income residents of Arizona. For that reason, St. Mary's Food Bank is certified as a Qualifying Charitable Organization. St. Mary's Food Bank exists to help feed hungry families throughout Phoenix and 9 Arizona counties. St. Mary's has a perfect 4/4 star rating with Charity Navigator and 95% of all donations received at St. Mary’s Food Bank directly funds our mission to help feed the hungry. St. Mary's Food Bank works with over 700 nonprofit partners to distribute food. Plus, with programs like Kids Cafe, which provides 6,000 meals daily to Arizona's children, and Community Kitchen, a culinary training program which provides students with skills to be successful in the food service industry, St. Mary's is committed to building community and improving the quality of life for Arizonans in need.

What is a Qualifying Charitable Organization (QCO)?

The Arizona Department of Revenue defines Qualifying Charitable Organizations (QCOs) as those that “provide immediate basic needs to residents of Arizona who receive temporary assistance for needy families (TANF), are low income residents of Arizona, or are children who have a chronic illness or physical disability.” QCO organizations are also required to spend at least half of their annual budgets on services to support those Arizonians that qualify for assistance. Let’s clarify a couple of these QCO requirements.

Temporary Assistance for Needy Families (TANF)

TANF is a federal program that provides grant money to states. The program has a variety of goals, and income eligibility for TANF is determined at the state level. States utilize the federal government’s grant funding, often in the form in direct cash assistance, in order to help family’s meet basic needs.

What is “Low Income” in Arizona?

“Low income” sounds like a subjective term, and to some extent it is – the income threshold for receiving cash assistance from TANF in Arizona differs from the income limit for Arizona Health Care Cost Containment System (AHCCS) eligibility, for example – but the state’s underlying purpose is clear. The Arizona Charitable Tax Credit is intended to spur donations to charitable organizations that provide a significant number of services for Arizona residents experiencing financial insecurity.

List of Qualifying Charitable Organizations (QCOs) and Qualified Foster Care Charitable Organizations (QFCOs)

Each year, the ADOR updates its list of the qualifying charities that meet the Department’s certification requirements. Arizona taxpayers should review this list every year to ensure the charity is certified by ADOR as a qualifying organization. St. Mary's Food Bank is a 501(c)(3) organization that meets the state of Arizona’s QCO certification requirements, qualifying the food bank to receive charitable contributions under the Arizona Charitable Tax Credit.

Deadlines and Key Dates for the Arizona Charitable Tax Credit

Contrary to popular belief, Arizona taxpayers do not need to make their charitable contributions to QCOs and QFCOs before December 31 of a given year in order to be eligible for state tax credits for that tax year. The state of Arizona allows taxpayers to claim tax credits for gifts through April of the current year for the prior tax year.

The IRS Deadline for Federal Credits and Deductions Differs from State Deadlines

IRS deadlines are different from Arizona’s state deadlines, however. The IRS specifies that, in order for contributions to be deductible on federal tax returns, contributions must be made “by the end of your tax year.” Keep this in mind when planning your charitable contributions and estimating your state and federal tax credits and deductions, and be sure to consult with your tax advisor regarding the optimal timing of your charitable gifts.

Percentage of donation that goes to charity?

95% of all donations received at St. Mary’s Food Bank goes directly to our mission, helping to feed those in need throughout most of Arizona.