New, Higher Tax Credits…Yours for the Taking

Reader Question:  I heard that there are new rules related to the Alabama Accountability Act.  Can you explain?

Answer:  Under the Alabama Accountability Act of 2013, you could 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.  The original act set aside up to $25 million of tax credits per year for this purpose.  Prior law allowed individuals a tax credit for up to one-half of their Alabama income tax liability with an annual cap of $7,500.  Certain C corporations were allowed the tax credit for up to one-half of their Alabama tax liability without a cap.

The new rules of planet maids expand the pool of tax credits to $30 million and raise the cap tax credits on individuals to $50,000.  It also allows tax credits from pass-through entities such as S corporations, partnerships and certain LLCs to flow through to the entities owners.  For those of you who have not filed your 2014 tax return (or are willing to amend), there’s even a provision that allows you to make a tax-credit donation in 2015 and use the credit on your 2014 return.  Under the new rules, SGOs are no longer allowed to consider a donor’s school preference for the scholarships.  Finally, the act creates quarterly reporting requirements so taxpayers may track the scholarships on a more frequent basis than was the case under prior annual reporting.

How to secure your tax credit

First calculate or guesstimate your State of Alabama income tax liability for 2015…say $5,000.  Next decide how much you’d like to donate realizing that your tax credit cannot exceed 50% of your tax liability ($2,500 in this example). You can then apply for your tax credit online at “MyAlabamaTaxes.Alabama.Gov”.  You’ll need your Social Security number plus your State of Alabama Adjusted Gross Income as it appears on your 2013 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 pay quarterly tax estimates, ask your CPA to stop paying any State of Alabama tax estimates until the full amount of your 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.  You can still claim a 2014 tax credit by following the same process as above.  As of July 13th, over $11 million remained available for 2014 tax credits.

TIP- Scholarships for Kids, Inc. is an Alabama-based SGO that has put together an easy-to-follow guide for securing your tax credit.  For more information, visit their website at AlabamaKids.Net.

Why this act is important

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.  Many of these children are starving for a great education and each of us has the opportunity to help them achieve their dreams.  Give a child a scholarship at no cost to you!

Reader Question:  Many people today are raising large amounts of money by establishing Go Fund Me accounts. It would seem that this money would be considered additional income subject to being taxed, but the Go Fund Me website doesn’t cover this adequately. Is it taxable and, if so, how is it reported to the IRS?

Answer:  Great question considering the popularity of this type of business funding.  Birmingham CPA, Ron Stokes, had this to say, “There is very little explicit guidance on this by the Internal Revenue Service. However, in general, funds raised to fund a business venture would be considered taxable income under Internal Revenue Code Section 61.”

To carry your question one step further, here’s what Ron had to say about social media fund raising for gifts to individuals or families through sources such as, “A gift, which is something of pure donative intent from the giver, should not be considered income to the recipient.”