With the Dec. 22 enactment of the federal Tax Cuts and Jobs Act, many Alabamians and companies doing business in our state should see a reduction in their 2018 federal income tax bills but, somewhat surprisingly, an increase in their state income tax liability.
Why? Because many high-income individuals and some multistate corporations have benefitted over the years by deducting their federal tax payments on their Alabama income tax returns. Ergo, a reduced federal tax deduction, without proper planning, may result in higher Alabama taxes this year and hereafter.
At the same time, the TCJA capped at $10,000 an individual’s total deductions for state and local income, sales, and property taxes, known as the SALT Deduction. However, charitable contributions weren’t capped by the act.
Thus, news and research organizations as diverse as The New York Times, The Washington Post and the Tax Foundation point out that taxpayers now have even more incentive to donate to a qualified scholarship-granting organization such as the Alabama Opportunity Scholarship Fund.
While receiving a dollar-for-dollar credit against their Alabama income tax liability (up to one-half), more importantly, qualifying taxpayers will be supporting thousands of our state’s most at-risk children in attaining the education they need to be successful and productive. In addition, the donation may be deductible as a charitable contribution on one’s federal tax return — at least so far. Individuals subject to the federal alternative minimum tax (AMT) may receive an added benefit when they donate to AOSF.
Due to a favorable ruling by the Alabama Department of Revenue last fall, Alabama taxpayers may now offset up to one-half their quarterly estimated state income tax liability (without penalty) by donating to a qualified SGO like AOSF, so there’s no reason to wait until the last quarter of the year. Indeed, AOSF reports there are more than 21,000 students on its scholarship waiting list, so the need is immediate.
As an added incentive to consider this idea soon, we can expect the limited allocation of tax credits under the Alabama Accountability Act to be claimed by Alabama taxpayers (generally, individuals and corporations) much earlier in the year than in past years. Those credits are claimed on a first come, first served basis through the ADOR’s “My Alabama Taxes” website. As of January 12, 10% of the credit allocation for 2018 had already been locked in by taxpayers.
The statements above are general in nature so please consult your tax or financial adviser to assist you in these calculations.
Bruce Ely is a partner with the law firm of Bradley Arant Boult Cummings LLP in its Birmingham office and an adjunct professor in the graduate accounting program at the University of Alabama’s Culverhouse School of Accountancy. He also serves as tax counsel for AOSF. However, all views expressed above are his own and not necessarily those of his firm or other organizations with which he is associated.
Republished with permission. This article first appeared in the Birmingham Business Journal on January 18, 2018. (login required)