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How does the Arizona Charitable Tax Credit work?
The Arizona Charitable Tax Credit (formerly known as the ‘Working Poor Tax Credit’) is a tax credit for anyone who has made voluntary cash contributions during any taxable year to a Qualifying Charitable Organization. Neighborhood Outreach Access to Health (NOAH) is an official Qualifying Charitable Organization.
How is a tax credit different from a deduction?
A deduction reduces the amount of your income upon which the tax is determined. A credit reduces your tax liability as if you had already paid the tax. Below are simplified examples that demonstrate the difference.
TAX DEDUCTION EXAMPLE
Mary and John earned $50,000 this year. They made an $800 gift to ABC Charity. Although ABC Charity is a nonprofit 501(c)3, it is not a Qualifying Charitable Organization for the tax credit. Mary and John can take a deduction for their gift which, after itemizing deductions, reduces their taxable income by $800. Their tax liability is now based on $49,200.
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TAX CREDIT EXAMPLE 1
Sarah and John earned $50,000 this year. They made an $800 gift to NOAH which is a Qualifying Charitable Organization for the tax credit. Their Arizona tax liability based on $50,000 in earnings is $1,680. They can take an $800 credit against their tax liability reducing it to $880.
$1680 Sarah and John’s original AZ tax liability
– $800 AZ Charitable Tax Credit
$880 Sarah and John’s final AZ tax liability
TAX CREDIT EXAMPLE 2
Mark and Linda earned $50,000 this year. They made an $800 gift to NOAH which is a Qualifying Charitable Organization for the tax credit. Their Arizona tax liability based on $50,000 in earnings is $1,680. Their payroll withholding for state taxes was $1,500. After applying their tax credit for their gift to NOAH, they received a refund of $620.
$1680 Mark and Linda’s original AZ tax liability
– $800 AZ Charitable Tax Credit
$880 Mark and Linda’s final AZ tax liability
– $1500 Payroll Withholding
$620 Refund due Mark and Linda
This information is for illustration purposes and is not intended to be legal or tax advice. Please consult your tax advisor or visit the Arizona Department of Revenue’s website regarding your individual situation.
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