If you had to spend $1,000 would you rather give it to the government or to charity?
Dumb question, I know. Let’s phrase it another way. What if you could make a donation and get your money back, or more, at tax time? In that situation, even Scrooge McDuck himself might sit up and take notice.
“If it sounds too good to be true, it probably is”. We all use this phrase from time to time and when I first heard about NAP credits, this thought immediately came to my mind. However, on further investigation I’ve found that this is one of the few exceptions that proves the rule.
Neighborhood Assistance Program (NAP)
Many states have Neighborhood Assistance Programs (NAP) to encourage individuals and businesses to make donations to approved non-profit organizations which focus their efforts on low-income individuals. Some have been around for quite a while. Virginia started its program in 1981.
Each year beginning July 1, qualifying non-profits receive tax credits which they then award to donors. The value of the credit varies by state and in Virginia it’s up to 65% of the donation. Remember, a tax credit is better than a tax deduction as it’s a dollar for dollar reduction in your tax bill.
This credit is available to an individual who donates at least $500 in cash or securities. Business may also make donations ($616 minimum) and can also donate merchandise, services or real estate. Note that each non-profit can decide on higher minimums or exclude certain types of donations.
I’m not a tax professional and you should always consult with yours before doing something that could impact your tax situation. With that in mind, let’s look at a hypothetical example. Mr. McDuck lives in Virginia and is in the 28% federal tax bracket.
For every $1,000 donated to a NAP approved non-profit Mr. Smith would receive at tax time:
$650 Virginia Tax Credit
$57.50 Viginia Tax Deduction
$280 Federal Tax Deduction
$987.50 Total state and federal tax savings
So, for a net out of pocket expense of $12.50, $1,000 goes to a charitable cause.
If Mr. McDuck was in a higher tax bracket, this gets even better. At the 33% or 39.6% federal brackets his total tax savings would be $1,037.50 and $1,103.50 respectively. In those cases Mr. McDuck would effectively be getting paid to give money to charity! If appreciated securities were donated instead of cash (e.g. stocks, mutual funds) he would also avoid paying taxes on the unrealized gain.
There are limits to how much an individual may receive in NAP credits each year. This year in Virginia the amount is $81,250 which equates to $125,000 in donations. Businesses, on the other hand, have no maximum amount of tax credits they can obtain.
These donations do not have to go to only one organization so you can spread your philanthropy around. In fact, most non-profits only have credits equal to $7,500 to $23,000 of donations. Some may also limit the maximum contribution they will take in order to accommodate multiple donors.
And don’t worry if you wind up with more NAP credits than you can use in a given year; you can carry the unused portion forward for up to 5 years.
Each year, several hundred non-profits take part in the program including many in the New River and Roanoke valleys. Some of these are local arms of national organizations such as Habitat for Humanity and the Salvation Army while others are homegrown such as the Montgomery County Christmas Store and the Valley Interfaith Child Care Center. In Virginia, there are 2 lists of participating organizations. One is sponsored by the Dept of Education and the other by the Dept of Social Services.
How to Claim Your NAP Credits
Once you’ve identified the group(s) you’d like to support, contact them directly to find out whether they have any credits left to give and their criteria for receiving donations. They will also provide you with a 1 page Contribution Notification Form (CNF) which you will need to complete and return to them along with your donation.
They will then process the form and send it to the state. In 6-8 weeks, you will be mailed a tax credit certificate from the state. Keep this with your other tax documents and give this hard copy to your tax preparer when they begin working on your tax return.