At this time of year, everyone ends up having taxes on their mind. Whether you’re expecting a tremendous refund or an insurmountable bill, odds are taxes are on your list of things to do!
While you’re thinking about the IRS, don’t forget the state you live in. It’s not uncommon to find clients who end up with a large refund from Federal while owing their state quite a bit of cash. The reasons for this vary and are not the subject of this post. However, there are some little known credits that exist and I would encourage you to take advantage of them as much as possible.
First, let’s answer the looming question……what is a credit as opposed to a deduction? If you know, then you can skip this part but for those of us who look at a tax form as if it is written in Greek, let’s keep moving. Here are the features of a TAX DEDUCTION:
- It is taken only when you are able to ITEMIZE your DEDUCTIONS. This is determined by the amount of your allowable deductions as opposed to the amount of your standard deduction which is reliant on your Filing Status. In other words, you would never itemize your deductions if you only have $500 in charitable contributions for the year and no other medical expenses, mileage for work with a personal vehicle, uniforms purchased for your job, etc. because your standard deduction (even if you are single) would be significantly higher than your $500 itemized deduction! Still Greek?
- It is used only to REDUCE YOUR TAXABLE INCOME before your tax liability is determined. Now, keep in mind that deductions can only reduce your income to zero, not beyond that! In other words, you cannot get your income to a negative number using DEDUCTIONS.
The features of a TAX CREDIT are as follows:
- It is taken when you qualify for the credit, regardless of your Filing Status (however the size the allowable amount of the credit can be determined by your Filing Status).
- It is used to REDUCE YOUR TAX LIABILITY and can even reduce it to a negative number! While that does not necessarily mean you will be getting a refund based on the credit itself, it will at the very least be a credit you can carry forward for up to 5 years from the year you established the credit!
Now that we have the Glossary, let’s move on to the crazy advantage we have as taxpayers in Arizona. To my knowledge, Arizona, Florida, Illinois, Iowa, Minnesota, Pennsylvania and Rhode Island are the only states that currently offer this type of TAX CREDIT. It is called the School Tuition Tax Credit. That can be a little misleading as only one facet of the credit it attributable to actual TUITION. That is the Private side of the credit. Allow me to explain.
Let’s say you want to put your son or daughter into a Private School. You would normally take a look at your budget and just decide if you can afford to have that type of expense and make the decision from there. You may go to family members who want to help you and get money from them that assists you to pay that tuition, but, for the most part, you will be on your own. It can be very expensive, too! When you compare the cost of a Private School education to the free Public School education, most parents will opt for the Public experience.
Well, in the above mentioned states, particularly in Arizona, there is an option that could allow you to send your son or daughter to a Private school FOR FREE while benefiting everyone involved (including the STATE!). How? Through TAX CREDITS! Here’s how it works:
Your family and friends all have some sort of State tax liability every year, whether they pay it all during the year as it is withheld from their paychecks or they pay it all at once on April 15th or a little of both, they all have some liability of taxes due to the state if they are gainfully employed. With the tax credit, SINGLE taxpayers can donate up to $500/year to a School Tuition Organization (STO) and then send $500 LESS to the State! That’s right, it’s as if they sent it directly to the Department of Revenue instead of to the STO! And the benefit to you and your child? They get up to 92% of that donation directly paid to their tuition account at the Private School they attend. Too good to be true? Well, then consider that a MARRIED COUPLE can donate up to $1000/year to an STO on behalf of your son or daughter! They can even specify a certain amount per child if they would like to!
Now, consider again that you are looking at the options for educating your child. That Private School Tuition seems a lot more like reality for your budget through the tax credit program, doesn’t it? And, for the skeptic, I’ve personally done it (both donated and received donated funds) so if you still think it’s too good to be true, just ask me and I’ll sit with you personally and show you how it works for you!
The questions I’ve always been asked are as follows:
- What if my family can’t give the $500 or $1000 all at once? They can spread it out throughout the year if they would like. Just remember that, depending on the STO, this may effect the way it is distributed to your tuition account. You will still receive all that you are entitled to, but the timing may be somewhat unpredictable.
- What if my friends have never had to pay that much to the State in taxes? They can still donate up to the allowable amount but they will have credit to run forward for up to 5 years. They should consult their tax professional or give us a call and we can walk them through the specifics. Also, just because $500 and $1000 are the allowable limits does not mean that you have to give that much! You can donate ANY amount! Remember, every dollar reduces your tuition account by up to $.92! They all add up!
- Why does the state allow this? Won’t they eventually go broke if everyone opts to send money to the STO instead of the Department of Revenue? First, we need to understand that the average cost for tuition for an elementary student in a Private School is about $5500/year. The cost to the State for the FREE Public School to educate the same child averages out to $7800/year! In light of that fact, if your friends and family donate up to $59o0 to fully fund your child’s tuition, they are SAVING THE STATE $1900/year for that student. Now, multiply that by an average class size of 12 students in the Private School and in just your child’s 2nd grade class, the STATE HAS SAVED $22,800 this year in educational costs!
- What if I don’t know anyone who has children in Private School but I want to donate anyway? Yes, you can give without specifying which student receives the benefit. The STO will then put the money into a Scholarship fund that is awarded to students of lower income families who cannot find enough donors to fund their tuition. Also, you can give to an STO and specify the school only. That school will then put that money into a scholarship fund that will also be awarded to lower income families on their roster.
- What if I also want to donate to the PUBLIC SCHOOL around the corner from my house? YOU CAN! The same bill that brings us the opportunity to give to the STO also gives us the ability to give to the PUBLIC SCHOOL as well! Either you can pay for your child to participate in extra-curricular activities or you can donate for a specific program to keep going so everyone else can enjoy the (for example) drama program! The limits are different. Please consult your tax professional or give us a call and we’ll help you determine what to do!
So, if you would like to direct where your tax money is going on the State level, give this some serious thought and then call us and we can walk you through the process! Oh, and, by the way, the donations all qualify as a TAX DEDUCTION on your FEDERAL TAXES because you are giving to an STO which is a 501(c)3 organization!
Now, GO GIVE!!!!! Here are a few links:
And, for the legalese: http://www.azdor.gov/TaxCredits/SchoolTaxCreditsforIndividuals.aspx#private
