Saturday, May 18, 2013

Q&A Series – Qualified Education Expense Tax Credit

From the Desk of Joe Rollins

This week’s question comes from a client who would like more information about Georgia’s Qualified Education Expense Credit

Q. I’m interested in donating to a Georgia Student Scholarship Organization. How does that work, and what are the tax advantages? Would my contribution cover any of my son’s private school tuition?

This is a timely question, because Governor Deal recently signed House Bill 283, which includes important changes to the Qualified Education Expense Credit. There are a lot of taxpayers who could be positively impacted by this credit, so thanks for your inquiry.

First, Student Scholarship Organizations (“SSOs”) were enacted by former Governor Sonny Perdue in 2008, to provide scholarships to independent K-12 student schools by using Georgia income tax credit-eligible charitable contributions. In short, taxpayers making donations to SSOs receive dollar-for-dollar income tax credits against their Georgia income taxes for their contribution. So, for example, if a married couple filing a joint return owes Georgia income taxes and makes a contribution to an SSO, it will reduce their Georgia income tax balance by the amount of the contribution, and they can also take a charitable donation deduction on their federal income tax return for their contribution amount if they itemize. That’s a pretty good deal, right?

In general, the maximum amount a married couple filing jointly can donate to an SSO per tax year is $2,500 (the maximum for an individual is $1,000). And if an individual has paid all of his/her Georgia estimated taxes for a tax year and then makes an SSO contribution in the same tax year which results in an overpayment after applying the tax credit against the Georgia income tax due, then the overpayment can be paid to the taxpayer. Also, for individual taxpayers, the credit may not exceed the taxpayer’s income tax liability, but the amount of the excess credit amount can be used against the taxpayer’s tax liability for the next succeeding five years.

Unfortunately, prior to HB 283, the only corporation type that was eligible to receive a tax credit for amounts contributed to an SSO, up to 75% of their income tax liability, were C corporations. Unfortunately, members of LLCs, shareholders of S corporations, and partners in partnerships were precluded from counterbalancing their share of the entity’s income by claiming the credit.

The passing of HB 283 has changed those rules, and now owners of pass through entities may claim a credit up to $10,000 per tax year. Spouses may also claim a credit for their ownership interests, which means they are separately eligible for the credit if they file a joint return. Please note, however, that the tax credits are only allowed on the Georgia income for which such tax was actually paid by the owner of the entity.

In the foregoing scenario, the total credit allowed can’t exceed $10,000, even if the taxpayer is an owner of more than one pass through entity. Therefore, the taxpayer must decide which pass through entities to include when computing Georgia income for the purposes of this credit. All Georgia income, loss, and expense from the selected pass-through entities are combined to determine Georgia income for the credit, which is then multiplied by 6% (Georgia’s tax rate) to determine the tax that was actually paid. In this case, if a credit is more than a taxpayer can use in the year, the excess amount can’t be carried forward.

It’s also important to note that if you are a member of an LLC, S corporation or partnership owner and you’ve already made an SSO contribution under the terms of the old bill (i.e., $2,500 or $1,000), you can still apply right now to make a donation for the difference under the changes pursuant to HB 283.

Part of HB 283 increased the Qualified Education Expense Credit Cap for 2013 to $58 million. Amounts are allowed on a first-come, first-served basis, and once that cap has been reached, there will be no more credits available for the 2013 tax year. If you are interested in contributing to an SSO for 2013, you need to do so ASAP – 75% of the $58 million cap for calendar year 2013 has already been preapproved.

The first step in contributing to an SSO is to check with the school of your choice to see if it is a participating school and if it partners with a particular SSO. Most SSOs provide a paperless process for redirecting your tax dollars to the institution.

Alternatively, you can apply for the income tax credit for qualified education expenses on your own by completing and filing a Qualified Education Expense Credit Preapproval Form, which is used to request preapproval of an intended contribution to an SSO. The Georgia Department of Revenue has 30 days to either preapprove or deny the requested amount, and once preapproval is received, the taxpayer has 60 days from the date of the preapproval notice – and within the calendar year in which it was approved – to make their contribution to their designated SSO.

Some additional important information to keep in mind is as follows:

  • Consistent with the federal treatment of charitable donations, a contribution to an SSO can’t be directly or indirectly designated for a particular individual – whether or not such individual is a dependent of the taxpayer. As such, contributions to SSOs are not payments toward your child’s private school tuition.
  • Although you can’t designate a particular individual for your contribution, you can designate that it be used to provide scholarships to students of a particular school (or multiple schools).
  • You can click here for a list of Georgia SSOs from the Georgia Department of Education. Note that an SSO may support several different participating schools.

  • I hope the foregoing has given our readers some useful information regarding Georgia Qualified Education Expense Tax Credit. These credits are useful tools in providing significant tax savings to taxpayers which ultimately provide scholarships or tuition grants that allow students to attend any qualified K-12 private school. Of course, this is a very complicated matter, so please contact us if we can provide more guidance and evaluate your particular situation.

    We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

    Best regards,
    Joe Rollins