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Navigating the extended Georgia Education Tax Credit

Georgia has been very successful at designing tax credit and incentive programs that give taxpayers an opportunity to save money, do good, and support programs that they believe in.

The Georgia “Qualified Education Donation Tax Credit” is one of those programs. The law allows both individual and corporate taxpayers to donate money to student scholarship organizations to provide funds for students to attend private schools. Taxpayers get a credit against their Georgia income tax liability, and scholarships are given to deserving students through the Georgia GOAL Scholarship program.

Annual Credit Limits For the Program

The annual limitations on the credit depend on the type of taxpayer, and the credits are not refundable. However, any credits claimed and approved but not used can be carried forward for five years.
The current limits are:
● $1,000 for single taxpayers
● $2,500 for married couples filing a joint return
● $10,000 for individuals who receive income as LLC members, S Corporation shareholders, or partners in a partnership as long as they have Georgia income tax liability on their aggregated passthrough income to cover the amount of the donation. Spouses can claim their own $10,000 credit as well for income from their separate passthrough interests.
● C Corporations and fiduciary taxpayers get a credit for up to 75 percent of their income tax liability for the year. (Fiduciaries cannot pass the credit through to beneficiaries.)

Passthrough Example

Recent regulations from the Georgia Department of Revenue (DOR) explain how owners of passthrough businesses can claim the deduction and carry forward any unused amount.

Jane Taxpayer, an individual, is the sole shareholder of A, Inc., an S corporation. Taxpayer also is a 50% partner in BC Company, a partnership.

Jane Taxpayer requests preapproval for the qualified donation tax credit for the calendar year 2019. She estimates that the Georgia income from A, Inc. is $120,000, and from BC Company is $60,000. The DOR preapproves Taxpayer for the full $10,000 qualified education donation tax credit because taxpayer’s estimated tax liability on $180,000 is $10,350 (5.75% of $ 180,000). (The 2019 income tax rate for Georgia is 5.75%.) Jane makes a $10,000 donation within 60 days of receiving preapproval and before the end of 2019.

But suppose Jane was optimistic about income levels. When she files her 2019 Georgia income tax return, the actual income from her passthrough interests is only $150,000. She can only claim an $8,625 credit (which is 5.75% of the $150,000 actual income from passthrough entities), and the extra $1,375 cannot be claimed. It also cannot be carried forward. However, any amount of the $8,625 claimed but not used by the taxpayer can be carried forward for 5 years.

Yearly Program Cap Raised Substantially

The law includes a yearly cap on the total amount of credits that can be awarded under the program. In the past, the cap was $58 million and was being reached each year. As a result, taxpayers have been unable to take the maximum credit. When the statewide cap is exceeded, donors get a prorated credit instead of the full amount they requested.

For example, for 2018, all applications received were prorated down to 49.49% of the amount requested because the $58 million cap was reached. Earlier this year, the Georgia legislature passed HB 217, which raised the aggregate cap to $100 million for the next ten years beginning on January 1, 2019. This increase should allow more taxpayers to take higher credits over the period.

There are Some Caveats

Taxpayers can select which school gets the donation, but not which students get the scholarships. Also, taxpayers cannot designate the money for a school which their children will attend. In fact, taxpayers have to confirm by checking a box on the form that they will not designate the donation for their child’s school.

Don’t Forget to get Pre-approved

The tax credits are given on a first-come, first-served basis. Taxpayers need to request preapproval online through the Georgia Tax Center on Form IT-QED-TPI. The DOR will let the taxpayer know within 30 days whether the request has been approved. Once the credit is approved, taxpayers must make the donation within 60 days of receiving the preapproval notice and before the end of the tax year.

Program Extended, Federal Issues

HB 217 extended authority for the program from 2020 through 2023, so the legislature will not need to revisit it until after that time. For the next few years, at least, the education credit gives taxpayers the option to redirect their tax dollars to private school scholarships.

One issue to consider with this program is how the donations will be treated on a taxpayer’s federal return. The DOR regulations require offsets if the taxpayer also receives a federal charitable contribution deduction. These limitations are complicated, so taxpayers should consult their tax advisors at Frazier & Deeter to discuss the overall federal and state tax savings from participation in the Georgia education credit program.

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