The following article was originally published in 2015. Note that an updated explanation of the tax impact under the new Tax Cuts and Jobs Act exists here.
Many of our early-career and mid-career professional clients face the annual reality of alternative minimum tax (AMT), knowingly or unknowingly. This secondary tax system captures a large segment of the working population – an estimated 3.9 million people in 2013. In Georgia, families with annual income between $200,000 and $600,000 are likely to fall into the trap of alternative minimum tax (AMT) and resultantly lose the benefit of traditional federal tax savings such as deductions for state income taxes, real estate taxes, or other miscellaneous itemized deductions. The income range of the AMT trap widens for families in high income tax states (e.g. New York, California, North Carolina, and South Carolina), families with high value real estate, families with large miscellaneous itemized deductions, and families with several children.
In many cases, there is little that can be done to reduce the impact of AMT. However, the passage of the Qualified Education Expense (QEE) Tax Credit Bill in 2008 gave Georgia residents an easy but underutilized way to meaningfully reduce their AMT liability.
The Basics of Student Scholarship Organizations
The intent of the QEE Tax Credit Bill that Governor Sonny Purdue signed into law was to give Georgia residents more control over how their education dollars were spent. The new law created Student Scholarship Organizations (SSOs) which permitted Georgians the opportunity to divert their tax dollars to a general scholarship fund at the school of their choice. The SSOs could then use contributions to award scholarships to public school students in grades K-12 so that these students could attend private schools.
Private schools in Georgia had an incentive to promote the program and encourage scholarship dollars their way. As a result, the QEE program quickly became popular. The law set a tax credit ceiling to limit the amount that could be diverted to SSOs each year and this ceiling was met earlier each calendar year. In 2015, the $58 million cap was hit on the morning of January 1st. Because of the program’s first-come, first-served allocation of tax credits, anyone who waited until after the start of the year to make the SSO contribution was out of luck.
How the SSO Program Impacts Taxes
The QEE program allows individual taxpayers to contribute $1,000 to an approved SSO and married taxpayers to contribute $2,500. The tax ramifications are quite simple with only three adjustments. Assuming that a married family donates $2,500 to an SSO through the QEE program,
- the family claims a $2,500 charitable deduction on the federal return;
- the family adds back $2,500 to Georgia taxable income; and
- the family claims a $2,500 Georgia tax credit.
The net result is that these adjustments wash with no net cost to the taxpayer on federal taxes. The taxpayer owes $2,500 less in state taxes because of the tax credit, countering the $2,500 donation made to the SSO. On the federal return, the charitable deduction is $2,500 greater whereas the state tax deduction is $2,500 less, making for no change in federal taxes (although there can be an additional cost of up to $150 on the state return for itemized filers not subject to AMT).
How AMT Filers Benefit
The reason this program is worthy of mention for tax planning purposes is that AMT permits charitable deductions but not the deduction of state income taxes. As a result, AMT filers convert what would otherwise be a non-deductible state tax liability into a deductible charitable contribution. A married couple contributing $2,500 to an SSO receives a $700 additional tax benefit (28% AMT rate x $2,500) that they would not have received without participating. Since the $2,500 contribution is returned to the taxpayer as a state tax credit, participation in this program offers an easy way to add $700 to the wallet.
How to Claim the Benefit
There are 32 approved Student Scholarship Organizations in the state of Georgia and the tax credit works the same regardless of which one you utilize. Two of the most popular SSOs are Apogee and Georgia Goal. Applying for the tax credit can be completed in 1-2 minutes on either of these websites and no payment is required until 2016, if you still choose to participate. Sometime in January, you will receive approval by mail from the Georgia Department of Revenue and you then have 60 days to make payment.
Why It Is Important to Claim Now
There is a $58 million cap on tax credits for 2016 and it is expected that the credits will all be claimed on January 1st, just as they were in 2015. Submitting an application now or sometime before the end of the year does not require any early payment and reserves you a place at the front of the line. Waiting until January to submit an application almost ensures that you will miss out on the 2016 credit.
It is a simple process and one that should only take a few minutes of your time. For Georgia residents seeking to meaningfully reduce the impact of alternative minimum tax (AMT), this tax credit is low hanging fruit.