The Alabama Supreme Court has voted in favor of the Alabama Accountability Act which allows Alabama taxpayers to receive an income tax credit of up to half of your state income tax liability by donating to a qualified Scholarship Granting Organization (SGO). These scholarships provide money to allow students from low income households to transfer from failing public schools to non-failing public schools or qualified private schools. Understand that this is a tax credit rather than a simple tax deduction. As a tax credit, your contribution is offset dollar-for-dollar against State of Alabama income taxes due. For example, assume that you expect to owe the State of Alabama $2,000 of income taxes. You decide to contribute $1,000 to a SGO. You write your check to the SGO; then on your state tax return, you take a $1,000 tax credit…so you send the Alabama Department of Revenue $1,000 instead of $2,000. In other words, it didn’t cost you anything to redirect these tax dollars to low income students who are trying to get a better education.
If you are paying Alternative Minimum Taxes (AMT), you could actually create a positive benefit from this gifting strategy. This is because state income taxes are an “add-back” for purposes of the AMT calculation whereas charitable contributions are not an add-back item. For example, we did this for a client based on a $7,500 gift to the SGO where the client was subject to AMT. The result was a net tax benefit of $2,100 for the client.
For individuals, the maximum annual tax credit allowed is $7,500 whereas there is no limit for corporations (some restrictions apply for certain types of companies). The state has funded this program with $25 million per year on a first-come, first-serve basis and joins seventeen other states in creating a partnership between taxpayers and children who most need alternative options for their education.
I wrote my check to Scholarships for Kids, Inc. Visit their website for more information or their ‘step-by-step’ sign-up process at www.alabamakids.net. I know my donation will make a difference in a child’s life.
The parent of a 3rd grade Scholarships for Kids student at Montgomery Christian School said it best: “Having Vanessa in a private school has really been a blessing. Just in her first week of school we could already see a big difference in her as a person. She’s learning so much!”
How to apply for your credit
You can apply for your tax credit online at revenue.alabama.gov ; then click on links under the “My Alabama Taxes (or MAT)” portal (upper left). I applied for the credit last week and it takes only a few minutes once you set up a user and password. You’ll need your Social Security number plus your State of Alabama Adjusted Gross Income as it appears on your most recent state income tax return (2013). On the same day you reserve your tax credit, you send your donation to the SGO. Your donation must be for the same amount as the amount you reserved online. The SGO also must confirm receipt of your donation with the Department of Revenue within thirty days in order for you to secure the tax credit. Since I pay quarterly estimated taxes, I’ve directed my CPA to stop paying any State of Alabama tax estimates until the full amount of my tax credit is used. If you are a W2 employee, have your Human Resources Department adjust your state tax withholding. Any unused tax credits can be carried-forward for up to three years.
Let’s all remember that the future economy of our state, in many ways, hinges on the quality of the education our state’s children receive. Under the Alabama Accountability Act, each of us has the opportunity to redirect a portion of our state income taxes, without any costs to us, to a better education for underprivileged children. Be sure to share this article with your fellow taxpayers and together we can raise the educational standards of our state!