As 2019 comes to a close, while most people are busy making holiday plans, dutiful tax advisors and financial planners are burning the midnight oil to minimize their clients’ tax bills that will be due in a few short months. Year-end planning strategies include an evaluation of a taxpayer’s potential federal and state income tax liabilities and opportunities to harvest losses or otherwise lower their 2019 taxable income. Additionally, taxpayers should consider whether tax-advantaged donations will help them meet their non-tax goals in a tax-efficient manner. For Alabama taxpayers especially, donations to qualified scholarship granting organizations (SGOs), IRC Section 529 college savings plans, or ABLE accounts should be considered, with the advice of their personal tax advisers.
Contributions to SGOs
For the past several years, many Alabama taxpayers have generously funded educational scholarships for low-income children assigned either to a failing or otherwise underperforming school by making contributions to one or more SGOs, such as our worthy client, the Alabama Opportunity Scholarship Fund (AOSF). In turn, qualifying individual taxpayers and “C” corporations may receive a dollar-for-dollar credit against their Alabama state income tax liability. As detailed in our July 2019 SALT Alert, the IRS issued final regulations as well as informal guidance regarding the federal tax treatment of such donations in light of the so-called “SALT cap” enacted as part of the Tax Cuts and Jobs Act of 2017. Unfortunately (in our opinion), the final regulations don’t provide the necessary relief for contributions to long-established SGOs and similar organizations in more than 17 states.
Under the final IRS regulations, as a general rule, if an individual donor in Alabama makes a $1,000 donation to AOSF or another qualified SGO, and registers that donation on the “My Alabama Taxes” website, he or she would be entitled to claim a $1,000 Alabama income tax credit, but now their federal charitable contribution deduction would be limited, in most cases to zero (with a couple of possible exceptions) discussed in detail in the July SALT Alert. There are exceptions to this general rule for C corporation donors, certain individuals with moderate amounts of SALT deductions, and (arguably) pass-through entity (PTE) donors. In light of the continued confusion surrounding these rules, below are answers to some “frequently asked questions” to provide some clarity for prospective donors and their tax advisers:
- Question: Under the final IRS regulations, if I make a year-end donation to a qualified SGO, such as AOSF, will I still receive a dollar-for-dollar Alabama income tax credit?
Answer: Yes, subject to the statutory cap on total donations to SGOs and subject to your 2019 Alabama income tax liability. Presently, and surprisingly, the amount of available credits under the statutory cap still stands at approximately $20 million dollars for 2019. Tax credits for donations by individual Alabama taxpayers are limited to 50% of their state income tax liability, not to exceed $50,000, and credits for donations by “C” corporation donors are limited to 50% of their Alabama corporate income tax liability. Credits for donations by PTEs, such as LLCs, limited partnerships, and S corporations, flow-through to the owners of the entity and are tested at that level.
- Question: Can I also claim a charitable contribution deduction on my federal return for my donation?
Answer: Although there is no federal statute that expressly prohibits this, the recent Treasury/IRS regulations bar the deduction except in very limited circumstances. In the alternative, if you forgo the state income tax credit, you could claim a charitable contribution deduction on both your federal and Alabama income tax returns, subject to normal limitations based on your adjusted gross income.
- Question: What happens if AOSF or another SGO in the state doesn’t receive adequate donations, at least equal to the dollar amount of the scholarships currently granted to low-income recipients?
Answer: The SGO must make the painful decision of notifying designated students that their scholarships will not be renewed, and they must either transfer to the failing public school to which they were assigned or seek other sources of funding to cover their tuition, books, etc. at their current school of choice.
- Question: In light of the final SALT cap regulations mentioned above, who are the “winners” and “losers”?
Answer: As discussed in our July 2019 SALT Alert, the “winners” from the final regulations appear to be: (i) C corporation donors; (ii) individual donors who itemize their deductions and have only a moderate amount of SALT deductions; and (iii) most PTEs receiving non-income tax credits in return for their donation (and perhaps PTEs that receive a state or local income tax credit, depending on further IRS guidance yet to be issued).
Unfortunately, the real “losers” are the children from low-income families who are in need of scholarships. According to Julie Emory-Johnson, executive director of AOSF, “AOSF provides Alabama taxpayers with a vehicle to easily leverage their tax liability to provide scholarships to over 1,400 low-income children. The time to give is now! The delay in clarity of the [IRS] regulations has slowed donations, and we still need several million dollars to keep current scholarships funded. Reservations must be made before December 31st at MyAlabamaTaxes.gov.”
Visit alabamascholarshipfund.org for a step-by-step process for making these donations.
Contributions to Section 529 Plans
For taxpayers who wish to create or enhance a savings account for a young person’s future educational needs, which now includes K-12 as well as college, contributions to an account that meets the criteria of IRC Section 529 can provide the donor with an Alabama income tax deduction, up to $5,000 ($10,000 for married taxpayers who each make contributions; see Ala. Code § 40-18-15(a)(28)). Alabama has established the CollegeCounts 529 Fund to enable these contributions, and accounts may be established with little effort at collegecounts529.com.
Contributions to ABLE Accounts
Taxpayers may also make qualified donations to tax-advantaged savings accounts for certain individuals with disabilities and special needs. These accounts, created under the federal Achieving a Better Life Experience Act of 2014 (P. L. 113-295), are commonly referred to as “ABLE” accounts. While these accounts don’t allow for an income tax deduction by the donor, the donation may be invested for tax-advantaged growth and distributions to the beneficiary. ABLE accounts provide a way for individuals with disabilities to receive contributions and accrue assets that are disregarded for most federal means-tested programs (subject to limitations). Alabama has established a qualified ABLE program, which allows for assets to be invested in a tax-advantaged account to help with the beneficiary’s future living and medical expenses. For taxpayers who wish to support an individual with a disability, a contribution to an ABLE account should be considered as part of year-end planning. Accounts may be established at enableal.com/home.html.
If you have any questions about these planning strategies, please contact one of the authors of this SALT Alert: Bruce Ely (firstname.lastname@example.org) or Brian Robbins (email@example.com), and consult your personal tax adviser.