Friendship, love, a caring smile…are among the greatest free gifts we can give. What is truly rare is being able to give the gift of a better education to a young child who desperately wants the best education possible. And while it does cost money, it cost you nothing. Here to explain is my partner, Michael Wagner, CPA, CFP®.
Michael: Is there any gift that can change a person’s future and their family’s future more than the gift of a great education?
Under the Alabama Accountability Act of 2013, you can receive a State of Alabama income tax credit when you donate 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.
Stewart: How does this work?
Michael: Individuals can ‘re-direct’ up to 50% of their State of Alabama tax liability (limited to $50,000) to a SGO in the form of a tax credit. A tax credit, unlike a tax deduction, creates a dollar-for-dollar offset…meaning you give $1,000 to an SGO and your State of Alabama income tax liability is reduced by $1,000. It also allows tax credits from pass-through entities such as S corporations, partnerships and certain LLCs to flow through to the entities owners.
Stewart: So, children get a better education and you get a tax credit? Sounds like a win – win.
Michael: It gets even 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.
We just did this for a client who was subject to AMT and who we estimated owed the State of Alabama $8,000. The tax credit cannot exceed 50% of their tax liability, so they elected to gift the maximum $4,000. The combination of tax credit and downward adjustment under their AMT created a net tax benefit of just over $1,200 for the client.
Stewart: Michael, what’s the process for someone who would like to sign up or get more information?
Michael: You will need to ‘reserve’ your tax credit online at MyAlabamaTaxes.Alabama.Gov”, to do so, you’ll need your Social Security number and your State of Alabama Adjusted Gross Income as it appears on your 2015 state income tax return.
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, you have the opportunity to redirect a portion of your state income taxes, without any cost to you, to provide a better education for children from low income families. Many of these children are starving for a great education and each of us has the opportunity to help them achieve their dreams. Best yet…it’s free!