Do I adjust my Arizona itemized deductions or increase my standard deduction when claiming a credit for charitable contributions?
Starting in Drake19, changes to IRS regulations require taxpayers to reduce their federal charitable contributions by the amount of the state credit. Per Treasury Decision 9864, the Arizona contributions will not need an adjustment for tax year 2019 since the amount of the state credit allowed should not be included in the charitable contributions entered for the federal Schedule A.
In Drake18 and prior, if you are claiming an AZ credit for charitable contributions made and claimed as a federal itemized deduction, you must make an adjustment to the AZ itemized deductions.
If you are not claiming an Arizona credit for any amount allowed as a charitable contribution, you do not need to make an adjustment to the federal itemized deduction for charitable contributions.
This situation may exist for the following AZ credits. See the instructions for each form for additional details.
- Form 321, Contributions to Qualifying Charitable Organizations
- Form 322, Contributions Made or Fees Paid to Public Schools
- Form 323, Contributions to Private School Tuition Organization
- Form 331, Donation of School Site
- Form 335-I, Contributions made by an S Corporation to a School Tuition Organization
- Form 340, Donations to the Military Family Relief Fund
- Form 341-I, Contributions made by an S Corporation to a School Tuition Organization for Displaced Students or Students with Disabilities
- Form 348, Contributions to Certified School Tuition Organization
- Form 352, Contributions to Qualifying Foster Care Charitable Organizations
On the screens for each of the above credits, there is a checkbox election that is used to generate the adjustment on the itemized deductions schedule. The itemized deduction adjustment is for the amount of charitable contributions made in the current year for which you generated a credit.
For example - Credit 321 allows a maximum credit of $400 for a single person. If the contribution amount is $500, the credit will be limited to $400 and the adjustment to itemized deductions will be $400, the amount of charitable contributions for which you generated a current year credit. This is true regardless of the amount of the credit actually applied against the current year tax since all the credits have carryover provisions for the unused portion.
In addition, AZ allows contributions made between January 1 and April 15 of the following tax year, to be considered as contributed on December 31 of the current tax year and eligible to be used in the calculation of the credit amount. This provision applies to Credits 321, 322, 323, 348 and 352.
In Drake16, a new contribution adjustment field was added that stores the amount of the credit claimed in 2016 that was generated from the 2017 contribution. This field is updated to Drake17. This was done to facilitate the adjustment that may be needed in 2017 to comply with the AZ instructions which state, “If you claimed a credit on your 2016 return for a contribution that you made during 2017 (see Arizona Forms 321, 322, 323, 348 and 352), you must make this adjustment on your 2017 return, even though you claimed the credit on your 2016 return.”
For instance, using the Credit 321 example above, if the $500 contribution consisted of $100 contributed in 2016 and $400 contributed between January 1, 2017 and April 15, 2017, then the 2016 contribution adjustment would be $100 and the 2017 contribution adjustment would be $300 ($400 credit minus $100 contribution in 2016 = $300, the amount of the credit generated from the 2017 contribution). If itemizing in 2017, by using the checkbox election for the adjustment to itemized deductions, the 2017 contribution adjustment, calculated and stored in the Drake16 and updated to Drake17, will be included in the itemized deductions adjustment amount.
In Drake17, the 2017 contribution adjustment field that updated from the Drake16 will be used in the itemized deduction adjustment. A 2018 contribution adjustment field was added in Drake17 to store the amount of the credit claimed in 2017 that was generated from a 2018 contribution.
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