FAQs @ the Final Hour: Answers to Tax Credit Queries
We are re-posting this FAQ guide, originally published on December 31, 2010 …
Each year there seems to be more buzz about school tax credit donations. Increasing awareness brings with it an increasing number of questions. Questions are good: they challenge us to think hard and answer them. Here is my attempt to answer the questions that have come my way over the last few years, and hopefully provide additional clarity and understanding on the topic. (Important reminder for all readers: I am not a tax professional; please consult one for expert advice. I am a public school educator who sees the need for more school funding on a daily basis.)
A quick list of the questions addressed below:
- How is the tax credit different than making a regular donation?
- But I don’t “owe” anything in April – the state owes me! How could I be eligible for this?
- Is there more than one kind of tax credit?
- Do I have to choose between the 3 options? Should I give to all 3?
- $900 or $1800?! Who owes enough taxes to the State of Arizona to make it feasible to give all 3?
- Do I have to give the maximum amount? Can I give to multiple places?
- Is the tax credit program political in nature?
How is the tax credit different than making a regular donation?
The State of Arizona will literally credit you the dollars that you contribute as if they were dollars that you paid in state taxes to Arizona directly. In other words, if I owe $2000 in state taxes this year and I make a tax credit contribution of $400 to a public school, then my taxes will be recalculated and I will owe the State of Arizona only $1600. Keep in mind that for your FEDERAL taxes, you can also claim this contribution as a normal tax-deductible contribution.
But I don’t “owe” anything in April – the state owes me! How could I be eligible for this?
If you are employed in the State of Arizona, then you owe taxes. Most of us take care of paying our taxes each week or month through our payroll deductions, so we are paying taxes all year long whether or not we are really conscious of it. In April 2011 when you “do your taxes,” some of the most important things you’re calculating include:
- The sum total of what you SHOULD have paid to the state and the federal governments during the year.
- The sum total of what you DID pay throughout the year.
- A comparison of #1 and #2 so that you can determine whether you paid too much or too little throughout the year.
- And, therefore …Whether you OWE the state or feds; OR whether they owe YOU.
Any tax credit contributions you make by December 31 are included as part of #2. So, using the scenario above … In Spring 2011 I sit down to do my taxes. Based on all of the calculations, I determine I owe the State a total of $2000 in 2010 (based on my income, deductions, etc.). Looking at my W2 it is evident that I paid MORE than that. Through my twice-monthly paychecks all year, I ended up paying a sum of $2200 in state taxes. I also made a tax credit contribution to a school for $400 in December 2010. What will I get as a refund from the State of Arizona? $600.
Is there more than one kind of tax credit?
The State of Arizona promotes three tax credit opportunities related to charitable giving:
- Public school tax credit: up to $200 for individuals and $400 for couples to any public school of your choice – traditional district school or charter school. The focus of the contribution is extracurricular or co-curricular activities not normally covered by the school’s operating budget.
- Private school tax credit: up to $500 for individuals and $1000 for couples to a private or parochial school. The focus of the contribution is on subsidizing tuition fees. [UPDATE as of December 2012: This figure has gone up. Consult local private schools for details.]
- Tax credit for charitable nonprofit organizations that serve the poor: up to $200 for individuals and $400 for couples.
Do I have to choose between the 3 options? Should I give to all 3?
You do NOT have to choose between the three different kinds of tax credits. If you were to give the maximum tax credit amount to all three kinds of organizations, your tax credit giving would total: $900 for an individual, $1800 for a couple filing jointly.
$900 or $1800?! Who owes enough taxes to the State of Arizona to make this feasible?
A colleague and I recently did some calculations around this question. Our best estimate is that individuals with an annual income of approximately $40,000 and couples with a combined income of approximately $80,000 can take full advantage of all 3 tax credits. (Like with all issues related to taxes, please consult a professional accountant for expert advice.)
Do I have to give the maximum amount? Can I give to multiple places?
You can split these dollars any way you want. For example, an individual could use their public school tax credit by giving $100 to their neighborhood school and $100 to another school of their choice. A couple who wants to contribute to a parochial school tuition organization but feels they cannot afford the full $1000, can give another amount that they can afford, be it $100 or $700; it’s up to them.
Is the tax credit program political in nature?
Like all issues related to taxes and the government, the tax credit program is a complex topic that involves a lot of political angles. I will just scratch the surface on this one. Here are a few facts to consider, each of which could be used to argue for and against the merits of the tax credits.
- Fact: When one takes advantage of the tax credits, one contributes less to the coffers of the state government.
- Fact: There are relatively strict boundaries for schools and charitable organizations regarding how they use their tax credit donations.
- Fact: When one gives tax credit dollars to a private school, one is contributing money to a private entity instead of a public institution or government.
- Fact: The State of Arizona is on the bottom rung year after year in the area of per pupil funding for public schools, often as low as 49th or 50th in the country.
Personally, what do I think? On a philosophical level, I agree with those who argue that the citizens of Arizona should be contributing more tax dollars to benefit the collective well-being of the whole state – and that the tax credit program undermines this effort. However, on a practical level, especially as a public school educator in Arizona, I take advantage of the tax credit opportunity and encourage others to do the same. It’s one way we have in Arizona to make a statement with our dollars – and remind the legislators in Phoenix that we put a premium on education and programs for the poor.
I hope that your New Year’s Eve traditions include making a contribution to a school and charity of your choice, as well as raising a glass at midnight. Cheers!
Carrie Brennan, Executive Director