I was speaking with a mayoral candidate who wants to focus on improving education in the inner-city schools. He said a high percentage of high school graduates scored less than 10% on math competency test. And that’s just the tip of the iceberg. A good education is the foundation for a better life and critical to a better Alabama economy in the future. The problem of underperforming and failing schools in Alabama is something we simply cannot ignore. The good news is that there’s a (partial) solution that every Alabama taxpayer can take advantage of right now that will make an immediate difference.
The Alabama Accountability Act (AAA)
AAA allows you to redirect a portion of your state income taxes to a Scholarship Granting Organization (SGO) who, in turn, will provide funding for a child who’s in a failing school to attend a private school or transfer to a non-failing public school. All of these children are from low income families so this is definitely not a giveaway for the rich. Here are the key points of the plan:
- This will not cost you a penny. You’ll receive a dollar-for-dollar income tax credit on your State of Alabama tax return.
- Step one- claim your tax credit at MyAlabamaTaxes.Alabama.gov. If you’re a first-time user, you’ll need to set up your account…only takes a minute.
- Step two- Make your donation to a qualified Scholarship Granting Organization (SGO). Note: you have 30 days from the date that you claim your tax credit to make your donation.
- Step three- The SGO will notify the state that they have received your contribution. The state will, in turn, confirm this to you.
- Step four- if you pay taxes quarterly, adjust your payments based on your contributions. If you pay taxes through payroll deduction, contact your HR department and adjust your State of Alabama tax payments accordingly.
- Your tax credit is limited to 50% of your tax liability…but don’t worry, any excess can be carried over to next year.
As an 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. 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.
If you need help
My favorite SGO, Scholarship for Kids, will walk you through this process if you’d like help. One of the things I particularly like about this SGO is that they require the parents to contribute at least a nominal amount towards the scholarship…making sure they have some ‘skin in the game’. You can get more information and an easy step-by-step guide at 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. Be sure to share this article with your fellow taxpayers and together we can raise the educational standards of our state!