As we mentioned in this blog in December, certain Alabama AMT taxpayers should consider donating to the Alabama Opportunity Scholarship Fund. The same process can be used to maximize your State and Local Tax Deduction.
Alabama has allocated $30,000,000 to this program for 2018. Currently, there is just over $6.5M remaining for 2018 and is being used up very quickly. If you are inclined to take advantage of this opportunity, we encourage you to act quickly. Please consult your JMF tax adviser for options relating to your specific state situation.
UPDATE TO ORIGINAL POST on March 8, 2018 – See comment below — the entire allotment is now gone. There is the possibility previously reserved funds may become available in the future. The ability to reserve donations, if any, on your MAT account will be available approximately on May 1st.
UPDATE 2 TO ORIGINAL Post on April 26, 2018 – We have been advised that the portal will open at midnight the morning of May 1st, 2018. There will be in excess of $1 million of tax credits made available at that time.We cannot guarantee that time of day but I’m confident that the early-risers will have the best chance at grabbing a tax credit reservation.
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% 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 (which are now limited to $10,000 annually – that’s income and property taxes) to a charitable deduction.
For example, on your Federal return your state and local tax deduction before the SGO donation is $25,000 and will be limited to $10,000 under the new tax reform. Your state tax liability is $20,000. You can contribute $10,000 (half your state tax liability) to an SGO and get a $1 for $1 deduction on your state taxes. With the SGO donation you have moved $10,000 of your $15,000 disallowed state and local tax deduction to a charitable contribution deduction. Do keep in mind the increased standard deduction amounts for the new tax reform as you likely do not want to consider this tax savings strategy if you will not be itemizing.
Relevant Links and questions:
What is the Alabama Opportunity Scholarship Fund?
Do other states have a similar program?
ASOF Complete Step by Step Guide
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.