Charitable Donation & State Tax Credit!

 

Bryan Strike

 MS, MTx, CFA, CFP®, CPA, PFS, CIPM

 June 5, 2018

 

I have written about utilizing Student Scholarship Organizations in the past (here), but their use is becoming more powerful with the new limitation on state and local income tax deduction.

Summary

The Georgia General Assembly in 2008 passed into law the Georgia QEE Credit Program to allow Georgians more control over how their education dollars are spent.  The law created Student Scholarship Organizations (SSOs)[i], which permit Georgians the ability to direct their state income tax dollars to a general scholarship fund at a school of their choice.  The SSOs then use these contributions to award scholarships for students in grades K-12, allowing them to attend private schools.

Private schools in Georgia clearly have an incentive to promote the program and encourage Georgians to contribute.  The law sets a tax credit ceiling to limit the amount that can be contributed to the SSOs each year.  With the immense popularity of the program this ceiling has been met earlier and earlier each year.  Because of the program’s first-come, first-served allocation of tax credits, anyone who waited is currently out of luck—until next year.

The maximum contribution is based on each taxpayer’s filing status with single individuals getting $1,000 and those filing jointly getting $2,500.  A common occurrence is the program becomes oversubscribed, where more people are submitting applications than there are spots available.[ii]  When the program is oversubscribed, the actual contribution per taxpayer is reduced equitably amongst all other taxpayers.

For example, I applied for the full $2,500 credit and received $1,375 for 2018 because the program was oversubscribed.

Taking Care of Taxes

The tax impact of this program varies a little based on your tax situation.  The factors include the following:

  • The contribution counts as a charitable contribution for federal income tax purposes.
  • The taxpayer can reduce their state income tax withholding or estimated payments by the amount of the contribution.
  • The contribution must be added back to state income for Georgia income tax purposes.
  • The contribution is then treated as a tax credit to offset Georgia income taxes dollar-for-dollar.

If a taxpayer utilizes the standard deduction on their federal income tax return, participating in this program will have no net cost.  It is simply a matter of being able to direct some of your state income taxes to a school of your choosing.

If a taxpayer itemizes their deductions, the net result can be a lower total tax bill.  Since state and local income taxes are limited to a maximum of $10,000, but charitable contributions are not limited, taxpayers can get the tax deduction benefit on their federal income tax return where none would have been available otherwise.  At the 25% tax bracket, this could save taxpayers up to $625 in federal taxes ($2,500 donation * 25%).

The downside is the addback of the contribution to Georgia income will create a 6% tax on that amount.  Therefore, the increase in state tax would be as much as $150 ($2,500 * 6%), netting taxpayers a benefit of $475 in lower taxes between federal and state taxes.

Bottom Line

Taxpayers that utilize the standard deduction will neither be harmed nor advantaged in contributing, while taxpayers that itemize could save a decent chunk of change.  In both situations, taxpayers are permitted to direct up to $2,500 to a private school of their choice and ensure that a portion of their state tax dollars support education in Georgia!

Claiming

Applying for the tax credit is simple and can be accomplished online from most SSO’s websites.  Because of the program’s popularity, it is important to get in line as soon as possible, even filing before the year-end for next year is advisable.  Personally, I have just signed up for the credit in 2019 (opening date was June 1).  You can do the same by applying here.  If you have any questions about this or any other matter, feel free to reach out to your advisor.



[ii] http://www.goalscholarship.org/blog/detail/georgia-taxpayers-significantly-exceed-cap-on-education-tax-credits

 

 

Bryan Strike, MS, MTx, CFP®, CPA, PFS, CIPM is a Financial Planner at Kays Financial Advisory Corporation. He can be reached at (770) 951-9001 or at bstrike@scottkays.com.

This report and Mr. Strikes’ comments are provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance.

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