“There’s no such thing as a free lunch”, or so the saying goes. But our Governor along with our state legislators have done just that for taxpayers with the passage of the Alabama Accountability Act of 2013. Here’s the deal:
You can receive a State of Alabama 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 funding 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 qualified Scholarship Granting Organization. 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….thus the ‘free lunch’. 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. And it gets better: 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 just 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. John West, CPA with Sellers, Richardson, Holman & West, LLP adds, “Credits may only be claimed by the donating individual or corporate entity and a taxpayer may not claim credit for a donation made by any other entity (such as a pass-through entity taxed as S corporation or partnership)”. The state has funded this program with $25 million per year on a first-come, first-serve basis and joins thirteen other states in creating a partnership between taxpayers and children who most need alternative options for their education. Drayton Nabers, former Chief Justice of the Alabama Supreme Court, had this to say: "I applaud the Governor and the Alabama Legislature for creating a powerful "win-win" situation for Alabama taxpayers and thousands of children who will be given very attractive alternative educational opportunities."
How to apply for your credit
You can apply for your tax credit online at revenue.alabama.gov ; then click on “My Alabama Taxes or MAT” portal (upper left). I applied for the credit last week and it takes only a few minutes. You’ll need your Social Security number plus your State of Alabama Adjusted Gross Income as it appears on your 2011 state income tax return. Once you reserve your tax credit, you must actually make your donation to the SGO within thirty days in order to secure the tax credit. If you’re like me and 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.
I wrote my check to Scholarships for Kids, Inc. They are an approved SGO and you can learn more about this program by visiting their website www.alabamakids.net.
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. Now that’s what I call a free lunch! Be sure to share this article with your fellow taxpayers and together we can raise the educational standards of our state!