Newly Enacted Legislation Creates Alabama Income Tax Credit

Written on August 21, 2013

The Alabama Accountability Act of 2013 was passed to create opportunities for students attending failing schools. One of the provisions of the Act creates a tax credit against Alabama income tax for taxpayers who donate to a nonprofit Scholarship Granting Organization (“SGO”) that provides scholarships for students to attend a nonpublic school or non-failing public school.

The credit may be claimed by individuals and corporations.

  • The amount of the credit that may be claimed by individual taxpayers is equal to the total contributions made to a SGO during the taxable year, up to 50% of the Alabama income tax liability of the taxpayer, not to exceed $7,500.
  • The amount of the credit that may be claimed by corporate taxpayers is equal to the total contributions made to a SGO during the taxable year, up to 50 % of the tax liability of the taxpayer.
  • The cumulative amount of credits available under this Act is $25 million annually.

The credits must be reserved by registering on the Alabama Department of Revenue’s website at http://www.revenue.alabama.gov/accountability/, and are available on a first come first serve basis. Individual taxpayers must have their social security number and 2011 Adjusted Gross Income in order to set up an account. Unused credits may be carried over for three years.

The contribution must be in cash. Taxpayers will write a check to the qualifying SGO, and then receive a tax credit on their Alabama return. Taxpayers also receive a charitable contribution deduction on their Federal return for the same amount, rather than generating a deduction for state income taxes paid. A charitable contribution deduction for Alabama purposes will not be allowed because the taxpayer will be taking the credit on their Alabama return.

For individual taxpayers who are in Alternative Minimum Tax (“AMT”), this contribution will generate a tax savings on the federal return because state taxes paid are considered a preference item (or disallowed deduction) for AMT purposes, but charitable contributions are not.

For individual taxpayers who are not in AMT, making the contribution will not generate a net cash savings, but will also not create an additional out-of-pocket cost. Thus, making the contribution will help those students in need without costing the taxpayer anything.

A list of Qualified Scholarship Granting Organizations can be found at http://revenue.alabama.gov/accountability/documents/Qualified_Scholarship_Granting_Organizations.pdf

If you have any questions about how this credit may benefit you, please contact your Warren Averett advisor.

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