5/23/18: LA Credits Provide Additional Benefit Under New Federal Tax Rules
The federal tax law changes passed in December of 2017 have provided an opportunity for non-business taxpayers in certain circumstances to effectively make money off contributions to certain Louisiana incentive programs that reward donors with state tax credits. These programs include the Tuition Donation Credit Program for contributions to School Tuition Organizations (STOs) and the School Readiness Tax Credit. We will discuss the School Readiness Tax Credit in a separate article.
We are referring to the new $10,000 cap on itemized deductions for state and local income and property taxes (known as the SALT deduction) that sent many running to pay property taxes in December. Under pre-2018 rules, if you were to donate to a charitable program that provided a 100% state tax credit, then the donation would be offset by reduced taxes owed to the state and the federal charitable deduction would be offset by a lower SALT deduction, so everything washed out. Under the new rules, you will not receive that SALT deduction to the extent that it exceeds the cap. The donation and tax credit still wash out, but you are getting the charitable contribution with the same SALT deduction you would have received anyway. You will be getting a free (or almost free) charitable deduction.
Tuition Donation Credit Program: STOs are 501(c)(3) charities that provide scholarships for Louisiana children from low-income households to attend nonpublic K-12 schools. Louisiana will provide a nonrefundable tax credit to an STO donor for the amount that the STO uses for scholarships, which, per state rules, must be 95% of contributions with the rest allowed for administrative use. If you choose to designate your entire contribution for administrative use, you will still get a charitable contribution, but will NOT get a tax credit because nothing went to scholarships. Contributions are made directly to one of the four STOs designated by the LA Department of Education (LDE). After LDE approves, the STO will forward the donor a showing the portion eligible for a tax credit. Save that LDE receipt because it will have to be attached to your Louisiana income tax return to claim the credit.
The four STOs in the state's program are below. Any questions regarding the organizations or donation procedure should be directed to them. You can click on the links for more info.
- New Schools for Baton Rouge Excellence Scholarship Fund,
- Alliance for Choice in Education (ACE) Scholarship Fund,
- Arete Scholars Louisiana, and
- Son of a Saint
The same treatment applies to contributing businesses other than C corporations since other businesses pass the charitable deductions and this tax credit to their owners. Since C corporations aren't limited by the SALT caps, the cash and tax deductions will wash out.
You should keep in mind that individual tax circumstances vary greatly, as do tax benefits of charitable contributions. The above information is not intended to be tax advice for the reader. If you have a question about your situation, please contact one of our Faulk & Winkler tax professionals at (225) 927-6811.