This Tax Strategy…Going, Going, GONE!


I love the fact that the Trump Tax Cuts & Jobs Act (TCJA) puts money in almost every working American’s paycheck.  We’re already beginning to see some of the effects with many corporations giving bonuses, expanding operations and creating jobs.  Locally, ServisFirst Bank increased their dividend by 120% due, in part, to tax savings because of the new tax law.  We are seeing this type of reaction by leading corporations across America.

To help pay for the tax cuts, TCJA has significantly limited income tax deductions.  The most prominent is the aggregate $10,000 deduction limitation for property taxes and state income taxes.

Let’s look at an example: If you paid $5,000 in property tax and $16,000 in State of Alabama income taxes in 2017, you would have received a $21,000 deduction on your federal income tax return.  In 2018, that deduction would be capped at $10,000, thus you would lose $11,000 of deductions.

The Disappearing Tax Strategy

A way to avoid losing all of this $11,000 deduction is to make a $8,000 contribution under the Alabama Accountability Act to a Scholarship Granting Organization (SGO).  This contribution gives you a dollar-for-dollar tax credit on your state income tax return (maximum tax credit equal to 50% of your Alabama tax).  This $8,000 contribution recharacterizes the $16,000 State of Alabama Income tax into a $8,000 State of Alabama income tax deduction and a $8,000 charitable deduction.  Now your State and Local tax deduction is $10,000 ($5,000 property tax plus $8,000 state income tax, but capped at $10,000) and you have a $8,000 charitable deduction giving you a total of $18,000 deduction.

You are basically converting a State of Alabama income tax deduction (limited to $10,000) to a charitable deduction (which has no limit under the new tax law).  In the top tax bracket (37%), giving $8,000 to the Alabama Accountability Act would lower your taxes by $11,000 ($8,000 on your State of Alabama return plus $3,000 on your Federal Return). So, you make $3,000 (a 37% return on your effort!!) by gifting $8,000 to help low income kids get a better education.  It is a Win-Win.

As a reminder, the Alabama Accountability Act provides a way for you to redirect up to half of your Alabama income taxes to a Scholarship Granting Organization who will, in turn, provide scholarships to low income families allowing their children to transfer from failing public schools to private schools.  In essence, we give these kids a chance at a better education and better future.

Why is this tax deduction strategy disappearing?  The total tax credit pool under the Alabama Accountability Act for 2018 is $30,000.  Once this pool of tax credits is ‘claimed’ by Alabama taxpayers, it’s gone.  In previous years, taxpayers never claimed all of the money because there weren’t great financial incentives to do so.  That’s changed and the money is being used up quickly.  As I write this article, the amount of unclaimed tax credits  is under $13 million and I expect this to be used up fast.

For a great resource for detailed information about how you can claim your deduction, visit  They even have an easy-to-follow ‘Take Action Now’ step-by-step guide to walk you through the process.   Your tax advisor can assist you in determining the optimum contribution for you.

I’ve claimed mine.  Have you claimed yours?  Tic Toc…procrastinating on this one could cost you hundreds or thousands of dollars of missed tax deductions.

Consult your tax advisor before acting on these comments.