Individual Tax Planning: Neighborhood Assistance Program (NAP) Credit Benefits

By Daniel Colonna, Tax Senior Associate

Under the Tax Cuts and Job Act (Public Law No: 115-97) the deduction on individual income tax returns for state and local taxes has been limited to $10,000 a year ($5,000 for married individuals filing separate returns).

One way to circumvent the limitation of this deduction is by participating in the Virginia Department of Social Services’ (VDSS) Neighborhood Assistance Program (NAP).

The program allows individuals to make charitable contributions to designated charities in Virginia of a minimum of $500 and up to $125,000 per individual, per tax year. Virginia will then allow a maximum tax credit of 65% of the value of the donation as a credit on the Virginia tax return.

Before the tax reform bill was signed into law by the President the ultimate benefit of NAP credits was generally not as great as a full deduction was allowed for state and local taxes. The state income tax deduction was diminished if an individual was in Alternative Minimum Tax (AMT). With the cap placed on state and local tax deductions, NAP credits may prove to be more advantageous, depending on individuals’ financial and tax situations, as the actual donation to the charity is not limited under the $10,000 threshold, but is fully deductible as a charitable contribution on the federal return.

If NAP credits are pursued, certain guidelines must be followed:

1. The eligible charity must be approved by the VDSS.
2. Consult with the approved organization to determine the available NAP credits.
3. Make the contribution directly to the charity without restriction. Contributions cannot be made through other non-profit organizations (such as United Way).
4. Complete Part I and II of NAP Contribution Notification Form (CNF-E) and send to the NAP organization.
5. The Nap organization will complete part III and send to the VDSS, and the VDSS will mail a tax credit certificate directly to the donor.

Charitable contributions and the related credits are applied in the year the contribution is made. For example, a charitable contribution made before December 31, 2018 will be deducted on the 2018 Form 1040 and the related credit NAP credits will be applied to the 2018 VA income tax return. So…. If you want to minimize the impact of the $10,000 limit on state and local tax deductions and help a charity, you should consider NAP credits that can take the place of other VA state tax payments. The amount of benefit to you will vary depending on your actual tax situation.

Please note that each taxpayer’s situation is unique and you should speak with your tax advisor before making any decisions. Questions on NAP credit benefits? Contact your Keiter representative or Email | 804.747.0000.  We are here to help.

Additional Tax Planning Resources:

• New Tax Law: What You Need to Know
• The Tax Cut and Jobs Act: 4 Tax Changes Homeowners Need to Know
• “Withholding Taxes: Are You Compliant?”
• Keiter Blog

Sources:

Virginia Department of Social Services Neighborhood Assistance Program Individual Donor Fact Sheet

Virginia Department of Taxation