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New Tax Deduction Limitations

Recent tax legislation will limit your Federal tax deduction for “state & local taxes” to $10,000, beginning in 2018.  The limitation on state & local tax deduction encompasses both income taxes and property taxes.  For 2018, your total state and local tax burden includes any amounts paid in 2018 through state and city withholdings, state and local real estate taxes, and local personal property taxes.  In considering this total, you stand to lose all but $10,000 of state and local tax deductions on your federal tax return in 2018 which translates to a loss of approximately 25% – 39% in federal tax savings.

One way to mitigate the impact of this adverse tax change is to utilize The Alabama Accountability Act Scholarship Granting Organization Donation.  This Act, passed by the Alabama Legislature in 2015, enables Alabama residents to use up to half of their State income tax burden to support approved schools in our State, which serve an economically disadvantaged student population.  The Alabama Accountability Act Donation provides state income tax credits (a dollar for dollar reduction in Alabama tax liability) to donors who contribute to a state-approved scholarship granting organization (SGO) operating within Alabama.  This payment counts the same as if you paid Alabama taxes, but for federal purposes, your donation will be reported as a charitable contribution.  Otherwise, the state tax payment would be reported on your federal return as a state & local tax deduction and provide no tax benefit to you.

The Alabama Accountability Act allows individual taxpayers to receive a credit of up to 50% of their Alabama income tax liability, limited to $50,000.  Please review your 2018 projected state tax liability to determine the amount of donation you may make as an SGO donation.  Any credit in excess of the 50% limitation is carried forward up to 3 years.

By utilizing the Alabama Accountability Act SGO Donation, a taxpayer can preserve federal tax savings of 25% – 39% of the amount of the donation made in 2018.

As a reminder, the total statewide credit is limited to $30,000,000 and is first-come, first-served.  We expect the full amount to be exhausted quickly this year.  Payments need to be verified to the Alabama Department of Revenue within 30 days of reservation so you will need to send payment shortly after reserving the credit online.  Should you prefer not to make the payment now, please check the My Alabama Taxes (MAT) website often, as it lists an up-to-date balance available of the $30M pool.

If you wish to take advantage of this program, there is a two-step process:

  1. Reserve your credit on the Department of Revenue web portal, MAT, and
  2. Write your check for that amount and send it to the Scholarship Granting Organization (SGO) as noted below.
    1. Have your 2016 Alabama 1040 with you since you will need your adjusted gross income to set up your account with the Alabama Department of Revenue.
    2. Follow the steps on this website https://myalabamataxes.alabama.gov to create your MAT account, if you do not already have one set up.
    3. Once that is completed, follow the steps online to reserve your tax credit with the state by clicking on “Report a donation to an SGO” on the right side of the web page..
    4. Fill in your personal information and make a selection of an “SGO”.
    5. Once all of that is finished, you then will write a check for the amount you reserved to the SGO you selected using the address provided on the Department of Revenue website.

Please contact our firm if you want to discuss or have questions.