Starting this year, the Tax Cuts and Jobs Act limits an individual’s or a couple’s federal tax deduction for state and local taxes (SALT) to $10,000. SALT deductions include deductions on state and local income, sales and property taxes. High-income earners, such as physicians, frequently have a SALT deduction far exceeding the new $10,000 cap and will, therefore, be negatively impacted by this change.
To illustrate, if you paid $9,000 in property tax and $22,000 in State of Alabama income taxes in 2017, you would have received a $31,000 deduction on your Federal return. In 2018, that deduction would be capped at $10,000. Consequently, the taxpayer will lose $21,000 of deductions. Fortunately for Alabamians, there is a way to help mitigate this adverse tax change in 2018.
The Alabama Accountability Act (AAA) provides an opportunity to preserve your state tax deduction through donations to a Scholarship Granting Organization (SGO). This Act, passed by the Alabama Legislature in 2015, enables Alabama residents to use up to half of their state income tax burden (limited to $50,000) to support approved schools in our state which serve an economically disadvantaged student population. The AAA donation provides state income tax credits (a dollar for dollar reduction in Alabama tax liability) to donors who contribute to a state-approved SGO operating within Alabama. This payment is treated as if you paid Alabama taxes, but for federal purposes, your donation will be reported as a charitable contribution. Otherwise, as described above, the state tax payment would be reported on your federal return as a SALT deduction subject to the $10,000 cap and provide no tax benefit to you.
Let’s update the illustration above to demonstrate the AAA donation benefit. You pay one half of the $22,000 state of Alabama income tax directly to the state as usual. You pay the remaining half of the $22,000 state of Alabama tax liability with an AAA donation ($11,000). The $11,000 AAA donation counts as a state tax payment on the Alabama tax return. However, on the federal tax return, the $11,000 AAA donation is deducted as a charitable contribution and escapes the $10,000 SALT deduction cap. The AAA donation preserves an $11,000 tax deduction which, at top federal tax brackets, is roughly $4,000 in federal income tax dollars.
It is important to emphasize the state allocates $30,000,000 annually for the AAA tax credit program. We expect the 2018 allotment to be reserved quickly, given the significant tax benefit the AAA provides. Therefore, we encourage you to act quickly, if interested, before the opportunity is gone. Based on the current AAA usage rate, we anticipate the $30,000,000 allotment for 2018 could be exhausted by the end of April or earlier.
If you wish to take advantage of this program, there is a two-step process:
1) Reserve your credit on the Alabama Department of Revenue web portal, My Alabama Taxes (MAT); and
2) Write your check for that amount and send it to the Scholarship Granting Organization (SGO) as noted below.
- Have your 2016 Alabama 1040 with you since you will need your state adjusted gross income to set up your account with the Alabama Department of Revenue.
- Follow the steps on this website https://myalabamataxes.alabama.gov to create your MAT account, if you do not already have an account.
- Once that is completed, follow the steps online to reserve your tax credit with the state by clicking on “Report a donation to an SGO” on the right side of the web page.
- Fill in your personal information and make a selection of an “SGO.”
- Once you have filled in your personal information, you will then write a check for the amount you reserved to the SGO you selected.
This SGO contribution benefits deserving schools, counts as a payment of your Alabama personal income tax and enables you to gain federal tax deduction for a cost that will be otherwise non-deductible. We encourage immediate action on this mutually beneficial step. If you need help, contact one of our Warren Averett Healthcare Consulting team members.
Article contributed by Sae Evans, Maddox Casey and Jim Stroud, Members, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.