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Act 11 (Special Session): Making Tax Credits for Charitable Contributions Available to all Vermont Taxpayers

Changes to Vermont’s tax code will now benefit all Vermont taxpayers making charitable contributions in 2018.

The Vermont Department of Taxes and Governor Scott worked with the Legislature to pass a Working Families Taxpayer Protection package during the 2018 session. This legislation, which went into effect on July 2, 2018, reduces Vermont’s marginal income tax rates by 0.2 percent (with the exception of the second highest tax bracket), increases the earned income tax credit and creates a 5 percent charitable contribution tax credit for all filers in accordance with changes made in the Federal Tax Cuts and Jobs Act (TCJA). Without these reforms, Vermonters would have experienced an arbitrary $30 million increase in their state income taxes and Vermont’s nonprofit sector may have seen diminished giving, as fewer Vermonters are expected itemize their taxes under the new federal rules.

Prior to the TCJA, signed into law in December 2017, approximately one-third of taxpayers had access to tax benefits associated with charitable giving. However, due to the doubling of the standard deduction at the federal level, which will result in fewer taxpayers having the ability to reach a threshold which makes itemizing beneficial, that number will drop significantly, resulting in less than 10 percent of Vermonters being able to enjoy a tax benefit for charitable contributions.

Act 11, enacted July 2, 2018, provides for a nonrefundable charitable contribution credit against the Vermont taxpayer’s tax liability. This credit is 5 percent of the first $20,000 in eligible charitable contributions made during the taxable year regardless of whether the taxpayer itemizes on their federal tax return.

Taxpayers should keep any documentation of charitable contributions made in 2018, including receipts, as the law and credit are retroactive to January 1, 2018. The Department of Taxes may ask filers to produce donation records.

Regarding what charitable contributions are eligible for the Vermont tax credit, Vermont law follows federal law 26 U.S.C. § 170 as amended by the TCJA and the relevant regulations. The Vermont Department of Taxes recommends that taxpayers consult their tax advisers and IRS guidance for information about what charitable contributions are allowed. Links to this guidance can be found in the 2018 Legislative Highlights.