The Alabama Accountability Act of 2013 signed into law earlier this year, provides Alabama state income tax credits for both:

  1. Families (individuals) with children at failing schools, that can be used to offset the cost of tuition to send their children to a qualifying private school (approximately $3,500 per year in tax credits per child), and
  2. Individuals or corporations that make a cash donation to a qualifying scholarship-granting organization.

This post will focus on the second Alabama tax credit listed above, the one for donations to qualifying scholarship-granting organizations.

This new Alabama tax credit is available for donations to qualifying scholarship-granting organization (SGOs). .

Individual taxpayers are limited to an Alabama tax credit of the lesser of $7,500, or their actual donation (a maximum of $7,500).  Corporate taxpayers are allowed a credit equal to 100 percent of their donation.  For all donors, the amount of the credit that can offset Alabama taxable income is limited to the lesser of 50% of their Alabama income tax liability or the amount of the allowable credit.

For individuals, their Alabama tax liability must be $15,000 or more in order to get the full benefit of the tax credit in the year the donation is made.  However, any limited portion of an allowable credit may be carried over for up to three tax years.

Credits may only be claimed once.

The federal tax effect is zero for individuals, unless the taxpayer is subject to the alternative minimum tax (AMT).  The amount that is donated should provide a federal income tax deduction, subject to normal federal limitations.  Keep in mind that any donated amounts that are eligible for an Alabama tax credit will reduce state income taxes.  So for federal tax purposes, the state income tax deduction will likely decrease by the same amount that the charitable deduction increases.  In other words, there may be no net change in Federal taxes for taxpayers that choose to make a donation to an SGO.  For some taxpayers, who are pay alternative minimum taxes (AMT) on their Federal tax returns, the donation may reduce their AMT liability.  For individuals who pay AMT, this reduction in Federal tax could be approximately $2,000, depending on the amount donated, the amount eligible for the state tax credit and the amount of AMT liability.

Organizations that wish to become an SGO must apply to the Alabama Department of Revenue (ADOR).  Beginning August 1, 2013, the ADOR will notify qualified SGOs that they are included on a list of organizations approved to accept qualifying scholarship donations.  There is a maximum of $25,000,000 in annual tax credits for this program.
Alabama Accountability Act of 2013

For a current list of SGOs maintained by the ADOR click here:
Scholarship Granting Organizations

For a current list of qualifying schools click here:
Qualifying Schools

There may be a sense of urgency for taxpayers who wish to make these donations, as once the maximum of $25,000,000 in tax credits has been allocated, donations will not be eligible for the tax credits.

To make a donation that is eligible for the Alabama tax credit, taxpayers will need to reserve their tax credit by signing up with the Alabama Department of Revenue using the My Alabama Tax system (MAT).  Click here for instructions:
Alabama Accountability Act Guidance

This summary is intended to provide an overview of the potential tax effects of making a donation under the Alabama Accountability Act of 2013.  It should be noted that by making these donations, taxpayers in Alabama will be re-directing some of what they would have paid in state income taxes to fund scholarships for private schools.  In Alabama, after deducting for the cost of collections and refunds, nearly all state income taxes go to the Alabama Education Trust Fund, to fund public schools.

Before making these donations, we recommend that all clients and friends consult with their tax advisor and contact the school and organization to which they wish to make a donation.