By:  Rachel Taylor, Tax Manager

Rachel is a tax manager in the JMF Tax Department.  She assists clients with corporate, partnership, and individual income tax reporting as well as complex oil and gas tax issues.

Would you like to reduce your AMT and provide a better education for children of Alabama? Consider donating to the Alabama Opportunity Scholarship Fund.

How does it work?  

Under The Alabama Accountability Act of 2013, donors can receive Alabama income tax credits for contributions made to a state-approved scholarship granting organization (SGO) within Alabama. The state tax credit can be up to 50 percent of the Alabama income tax liability (or maximum credit of $50,000). Any unused portion of the credit will carryover for three years. Essentially, this approach allows taxpayers to divert their tax liability into funds donated to an SGO.

The tax savings appear on the federal tax return. The best strategy is to divert your Alabama estimated tax payments to an SGO. This moves your federal deduction from a state taxes deduction to a charitable deduction. This is beneficial because state taxes are an Alternative Minimum Tax (AMT) add-back item, while charitable contributions are not. Therefore taxpayers can reduce an AMT preference item and that is where the savings begin. While the federal tax savings are beneficial, taxpayers do not have to be in AMT in order to contribute.

What is the Alabama Opportunity Scholarship Fund? 

The Alabama Opportunity Scholarship Fund (AOSF) is the state’s largest SGO and they provide scholarships to children in Alabama. The scholarships allow children in Alabama to move from a failing school to a private school or a non-failing public school. Scholarships are awarded to children, not schools, so if a school initially chosen by parents or guardians is not a good fit for their children, the scholarship is transferable to any other participating school. Ultimately, the Alabama Opportunity Scholarship empowers families to choose the school that best fits their child’s educational needs. Even if taxpayers are not in AMT and will not benefit from the additional tax savings, this is still a worthy cause. For more information about the Alabama Opportunity Scholarship Fund and a list of participating schools, please visit www.alabamascholarshipfund.org.

Who qualifies for this credit and how do they donate?

There is no residency requirement for a taxpayer making a cash donation to an SGO, and therefore, the income tax credit is available to all Alabama taxpayers who owe state income tax. Taxpayers who are interested can log into Alabama Department of Revenue’s MAT system online to reserve a credit. The state of Alabama only allows total credits of $30 million, which is why a reservation is needed for a donation. Once the reservation is made on MAT, the donation to AOSF must be made within 30 days of the reservation but no later than 12/31/17. Any donation amount is welcomed. If taxpayers are a first-time user of the MAT system, they may access the MAT portal by visiting myalabamataxes.alabama.gov to sign up for a new account. Please let us know if you would like us to help you set this up.

Do other states have a similar program?

A number of other states have a similar scholarship program that provides a state income tax credit to the donor. Please consult your JMF tax adviser for options relating to your specific state situation.

All taxpayers, including businesses, are eligible to contribute. For more information about your specific tax situation, please contact your tax advisor.

If you have any questions pertaining to this information or any other tax concerns, please call us at JamisonMoneyFarmer PC.  The items presented here are not intended to be all-inclusive but represent some very important considerations for you and your tax-planning.

Also check out ASOF Complete Step by Step  Guide.