As the holidays roll through town, Arizona residents also see the hearty panoply of signs, e-mails, and correspondence from certain schools and charities, encouraging them to take advantage of Arizona’s specialized income tax credits. You will hear both charities and individuals explaining how these charitable gifts don’t cost you anything, and some even claim that you will yield a net profit by making the contribution. In this article we review WHICH charities can qualify for which credits, and how the specific contributions will ultimately affect your tax bill.
Credits Versus Deductions
The first question an individual might ask is, “What’s special about these credits? Don’t I already get a Federal tax break for donating money to any charity?”
You may get a deduction for Federal income tax return if you have enough expenses to itemize your deductions. But even if you do, there is a big difference between a charitable deduction, for Federal Income Tax purposes, and one of Arizona’s credits, in how much money it actually saves.
As a very simple example, if your marginal income tax rate is 30%, and you make a $100 qualified donation to a charity, and you deduct it on your Federal income tax return, it saves you $30 in tax. (You subtract the $100 from your taxable income, and because that number is multiplied by 30%, that’s the amount you save.) So, it actually still costs you $70 out of your own pocket to benefit the charity, although they receive the full $100.
A credit is much more direct, and gives you a “dollar-for-dollar” savings. Under that same example, if you gave $100 which qualified for an Arizona tax credit, it reduces your Arizona income tax by the full $100, saving you a full $100. That means it will cost you nothing to give that money away to a charity. And that is why these Arizona credits are such a big deal, why they are so heavily promoted, and why each individual should at least consider making these gifts for the tax credit.
There was some discussion (including among professionals) about how use of the credits could actually MAKE you money, because you saved dollar for dollar against your Arizona income tax, and then, if you itemized, you reduced your Federal income tax a bit as well by a deduction. However, this windfall doesn’t actually happen, because your Arizona income taxes are also a deduction on your Federal itemized deductions, and so, when you cut your Arizona income taxes by the amount of the credit, you also reduce your Federal itemized deductions.
All this technical analysis just boils down to the fact that, if you make a donation that qualifies for one of Arizona’s special income tax credits, it costs you nothing.
However, the qualifications for these special credits are quite specific, and because of some overlap and different operation, can be confusing, so the following explanations may help you understand how the different types of charitable giving function.
Organizations Providing Assistance to the Working Poor
One of the Arizona tax credits is available for cash contributions to organizations that provide assistance to the working poor. There is a specific list of qualifying organizations, maintained by the Arizona Department of Revenue, and it can be found here:
http://www.azdor.gov/LinkClick.aspx?fileticket=fHenh3bja6w%3d&tabid=133
But, an organization can also qualify if they are a qualified charity for federal purposes, and if the charity can confirm they spend more than 50% of their budget on qualified disbursements. Obviously, the easiest and safest way is to use an organization on the list provided by the Arizona Department of Revenue.
The maximum amount of this Organizations Providing Assistance credit is $400 for a married couple (up to one-half on each single if the spouses file separately) or $200 for a single individual.
The Arizona Department of Revenue has a published information sheet on this credit.
http://www.azdor.gov/LinkClick.aspx?fileticket=yx2LZ-ML8yI%3d&tabid=130
As always, you should get a receipt from the organization with the specifics of the cash donation to submit with your tax return.
Public School tax credit
There are also two distinct Arizona tax credits related to education. The first is the Contributions and Fees Paid to a Public School. This one is particularly unusual, because it includes fees you have paid for your own child’s extra curricular activities. (This goes against the general requirements for charitable deductions, fees paid for your own child under this credit don’t qualify for a Federal charitable deduction because they benefit you or your family.)
The maximum amount of this credit is $400 for a married couple (up to one-half on each return if the spouses file separately) or $200 for a single individual. The same limits that apply to contributions for organizations that assist the working poor.
This credit applies to either cash donations (a more typical charitable contribution), or fees paid, even for your own child, to a public school (including charter schools), for extra-curricular activities, or for character education program, defined under statute as dealing with attributes such as honesty, responsibility, compassion, and respect. The extra-curricular activities would include fees associated with athletics, band, laboratory sciences, etc.
The school must provide you a receipt for amounts that qualify for this credit, including the school name, district number, your name, amount and date paid, and the activity being supported.
The Arizona Department of Revenue has a published information sheet on both the educational credits.
http://www.azdor.gov/LinkClick.aspx?fileticket=lyMlhtowOpw%3d&tabid=240
Private School Tuition Credit
The second educational Arizona tax credit, which applies to private schools, is more of a traditional charitable donation, in that the amount has to be donated without receipt of benefits, so it would not include fees or tuition paid for your own child’s education.
The Private School Tuition Credit allows you a credit for cash donated to a “School Tuition Organization” that provides grants or scholarships to private schools. (The technical requirement is that 90% of its annual revenues must be allocated to scholarships and grants, and they must be made to more than one school.)
Like the Contributions to an Organization that assists the working poor, there is a discrete list provided by the ADR of the qualified School Tuition Organizations.
http://www.azdor.gov/LinkClick.aspx?fileticket=cSEiHcmcqPQ%3d&tabid=240
The maximum amount of this credit is $1000 for a married couple or $500 for a single individual.
Also starting in 2011 is more flexibility to the timing of the donation. As long as you make a qualifying donation before April 15, 2011, that donation can be used for a credit on your 2010 taxes. You can also opt to “save” it and use it against your 2011 taxes.
Again, getting a letter acknowledging receipt, and the qualified nature of the organization, is essential.
Conclusion
Obviously, many organizations and schools that meet these criteria would love to be the beneficiaries of your donations. Once you understand how these credits really work, and the impact on your bank account, you can make an informed decision whether you want to make appropriate donations, and to which charities.
