Colorado Caps Charitable Deductions For Wealthy

Itemized deductions, including charitable deductions, will be capped for high-earning taxpayers in Colorado, starting next year. The Colorado Nonprofit Association (CNA) estimates the reduction in giving could get close to $100 million.

Gov. Jared Polis signed legislation to cap itemized deductions at $30,000 for individuals and $60,000 for couples for taxpayers with adjusted gross income (AGI) of $400,000 or more. The bill (H.B. 21-311) was part of a package to raise $400 million in revenues for the state to spend on priorities for lower-income families and small businesses, such as expanding the state child tax credit and Earned Income Tax Credit (EITC). 

Prime sponsors of the bill were Emily Sirota (D-Arapahoe-9) and Mike Weissman (D-Arapahoe-36) in the Assembly and Chris Hansen (D-Arapahoe-31) and Dominick Moreno (D-Adams-21) in the Senate.

The deduction limit is expected to increase state revenue by almost $124 million in its first full year (Fiscal Year 2022-23), according to an analysis provided with the legislation. About 10,200 Colorado taxpayers claimed itemized deductions more than the caps for the tax year 2018. On average, each taxpayer’s deductions exceeded the limitations by about $225,000. 

In tax year 2022, the bill is expected to require income tax additions averaging $252,000 for 10,600 taxpayers — an amount expected to grow with taxpayer incomes in subsequent years. Beginning in tax year 2022, the bill requires taxpayers with AGI of $400,000 or more to add back a portion of their federal itemized deductions when calculating their Colorado taxable income, according to analysis of the legislation.

The itemized deduction cap basically is a 7% to 8% increase in the price of giving for taxpayers with incomes of $400,000 or more, according to Mark Turner, senior director for public policy with CNA.  The bill passed along strict party-line votes and the majority was intent on paying for the package by reducing tax breaks for wealthy taxpayers, he said. The association estimates that taxes would apply to about $1.6 billion of giving from high-income taxpayers and raise $75 million in revenue for the state, based on 2018 IRS data, the latest available. Colorado’s income tax rate is 4.55%.

CNA estimates that giving would be reduced between $19 million and $96 million. Other states that have adopted itemized deduction dollar caps, like Hawaii and North Carolina, ultimately exempted charitable giving, Turner said.

“We are considering our next steps for how to monitor the impact of these changes on giving and ascertain whether these taxpayers will be low or moderately responsive in terms of their giving,” Turner said.

“This is an area of constant churn. The Colorado law is the rare one that makes it all the way through the process,” said David L. Thompson, vice president of public policy for the National Council of Nonprofits. “This gets proposed in various states each two-year period but rarely passes,” he said, adding that Colorado is likely the only state that actively sought to cap the itemized deduction this year.

Charitable contributions declined considerably after Michigan in 2011 repealed tax credits for donations to the work of food banks, homeless shelters and community foundations, according to the National Council of Nonprofits. Missouri restored a series of tax credits that had lapsed for giving to various charities. 

A decade ago, Hawaii had imposed a cap on itemized deductions, including charitable donations and mortgage interest, but later lifted the experimental cap after seeing “adverse effects on charitable giving.” The cap was expected to generate $12 million for the state treasury, however, donations were estimated to fall by $60 million a year, according to the Hawaii Community Foundation.