How to Get a Georgia State Income Tax Credit and a Charitable Contribution Deduction at the Same Time
By Rick Henderson CPA, CFP®, AIF®
It is not often that you can get both a Federal charitable tax deduction and a credit against your Georgia income taxes at the same time. In Georgia, there are now two ways that taxpayers can make this happen. Even though the new Federal tax law lowered tax rates and doubled the standard deduction, it is very important to many Georgia taxpayers to continue to seek ways to reduce their taxes because the new federal tax law has limited the itemized deduction for State and Local Taxes to $10,000 per year (the SALT Limitation), limited or eliminated other itemized deductions, and eliminated personal exemptions. Utilizing both these programs, a married couple can effectively convert deductible charitable contributions for federal tax purposes of up to $20,000 ($30,000 for married owners of pass through entities), into state tax payments or credits, which would not have been deductible for Federal income tax purposes once the taxpayer’s SALT limit has been reached.
Something New: The Georgia Rural Hospital Tax Credit
- What It Is: Established in 2016, the original bill allowed people to receive a state income tax credit for 70% of the amount donated to approved Rural Hospital Organizations (RHOs), up to $10,000 per year per married couple; $5,000 single. When that failed to generate much in the way of donations, in 2017, the Georgia legislature expanded the credit to 90% of the donation amount. Then on May 2, 2018, to stimulate an increase level of donations, Governor Deal signed into law an updated version of the law which does the following effective July 1, 2018:
- Removes the annual $10,000 credit cap for married taxpayers ($5,000 single) for donations after June 30 of every year.
- Increases the credit amount to 100% of the amount donated.
- Allows owners of pass through entities to qualify as eligible contributors.
- The availability of this credit is subject to a $60,000,000 annual cap and the benefit of this credit is available to anybody that pays state income taxes in Georgia. However, the biggest benefits will go to high income taxpayers who have itemized deductions in excess of the standard deduction. Taxpayers whose itemized deductions add up to less than the standard deduction can still benefit as long as after their donation to an RHO, their itemized deductions exceed the standard deduction.
- How It Works: Let’s look at a hypothetical married couple in the 35% marginal federal income tax bracket. Before making any sort of donations to an RHO, their federal itemized deductions are at least $24,000. If, after June 30, they make a $10,000 contribution to an RHO, they get a $10,000 charitable deduction, saving them $3,500 in federal taxes for a net cost of $6,500. Then, they get a state income tax credit of $10,000 to be applied to their state income tax liability, bringing the economic gain on the $10,000 donation to $3,500, or 35%.
- To Sign Up: Visit www.georgiaheart.org
Something Old - A Reminder: The Georgia Education Expense Tax Credit
- What It Is: Many people are familiar with and have participated in this very popular program since its inception in 2008. The program allows taxpayers to donate to a Student Scholarship Organizations (SSOs) that provides student scholarships to eligible students to attend private school. The taxpayer is allowed to take a charitable gift tax deduction and also receives state income tax credit for donations to these SSOs for up to $2,500 for married filing joint taxpayers, and $1,000 for individual taxpayers. For corporate taxpayers, the credit is up to 75% of their annual state income tax liability. Owners of pass through entities are allowed a $10,000 credit, and married couples who own pass through entities can get a credit up to $10,000 each for a total of $20,000.
- How It Works: Similar to the way that the Rural Hospital Credit works above, except donations must be made to a qualifying SSO, and the limitations are lower. In addition, this is a very popular program and the $58,000,000 cap for the 2018 credits was reached on January 2, 2018. SSOs should soon be soliciting donations and commitments from donors for the 2019 tax year. So, if you are interested in this program for 2019, I would recommend getting in touch with your preferred SSO(s) and make sure that you receive and complete the application forms for claiming the credit for 2019.
- How to Sign Up: To learn more, you can visit www.goalscholarship.org. Your application for the credit must be submitted for preapproval to the Georgia Department of Revenue and, once you have received approval, you have 60 days to make your contribution to the SSO. Most SSOs like Georgia Goal Scholarship will help you complete and submit your preapproval form to the Georgia Department of Revenue.
For a list of qualifying SSOs, please visit: http://www.gadoe.org/External-Affairs-and-Policy/Policy/Pages/Tax-Credit-Program.aspx. Also, if you have a particular school that you would like your donation to benefit, contact that school to see which SSO they work with.
Once again, donations to each of these programs can benefit many Georgia taxpayers by providing both credit against their state income taxes and a charitable tax deduction for those itemizing deductions of their federal tax returns. Basically, two benefits for one donation. The benefits can be even higher to those owning pass through entities which are commonly used by small business owners and professionals like doctors, dentists, attorneys, engineers, etc. Also, please remember that there are annual caps for these programs, so if you are interested in taking advantage of the benefits, time is of the essence.
One final note about these Georgia tax credits. The IRS has recently announced that as a result of the efforts of some states to enact state level tax changes in order to work around the new $10,000 deduction limit for state and local taxes under the new federal Tax Cuts and Jobs Act, it will issue proposed regulations that could affect states’ attempts to circumvent the $10,000 deduction limit for state and local taxes. Therefore, it is possible that the federal charitable deduction for these two state tax credit programs could be taken away.
However, these credits were available in Georgia well before the new federal tax law was passed. If you make a contribution to these programs and the charitable deduction is disallowed, you are no worse off except from a cash flow standpoint, because you will ultimately still get the state tax credit. But, as mentioned above, these programs are finite in their availability, so if you wait for further guidance from the IRS, you might miss your opportunity and end up paying more taxes.
If you have any questions about these credits, please contact your Atlanta Financial Advisor. As always, before using these or any other tax strategies, we highly recommend that you consult with your tax professional.