Friday, December 7, 2012

Tax Tip - Don't Forget the Arizona Tax Credits for Individuals

As the end of 2012 draws near, many people start thinking abour income taxes and wondering how they can lessen the tax burden they may face.  With all the news coverage of the "fiscal cliff" and the inability of Congress and the President to reach an agreement on extending the so called Bush Era Tax Cuts, this question of even greater significance this year than in the past. 

The State of Arizona has three options available to individual tax payers who would like to direct how their state tax dollars are spent.  These come in the form of tax credit donations.  A tax credit differs significantly from a tax deduction.  A deduction reduces the base on which the tax is calculated.  Thus, if the tax rate is 4% and person makes a $400 donation, the tax savings is only $16.  Contrast this with a tax credit, which is a dollar for dollar reduction in the income taxes.  Thus, if a person makes a $400 donation that qualifies for the tax credit, then their income taxes would be reduced by $400.  So, what are these tax credit donations?

The first is the Credit for Contributions Made or Fees Paid to a Public School.  The maximum amount of this credit is $200 for single taxpayers or heads of household and $400 for married taxpayers filing a joint return.  The money paid to the public school must be in the form of a donation or for the payment of fees for extra curricular activities.  This credit is allowed even if the payment is for fees for the taxpayer's own child or relative.  The contribution or payment of fees must be made on or before December 31, 2012 in order to be eligible for the credit for 2012.

The second is the Private School Tuition Credit.  This is available for taxpayers who make donations to a school tuition organization that provided scholarships or grants to qualified private schools.  A school tuition organization is one that is tax exempt under the Internal Revenue Code, Section 501(c)(3) and that allocates at least 90% of its annual revenue to scholarships or grants to students of more than one school.  The maximum amount the credit for 2012 is $503 for a single taxpayer or head of household and $1,006 for a married couple filing a joint return.  However, unlike the Credit for Contributions Made or Fees Paid to a Public School, the taxpayer may not claim the credit if they designate the donation for the direct benefit of their dependent or if they name a specific student beneficiary as a condition of the donation or if they "swap" contributions with another contributor.  Furthermore, the timing of the donation is different for the Private School Tuition Credit.  Donations made between April 16, 2012 and December 31, 2012 must be claimed on the 2012 return.  However, donations made between January 1 and April 15, 2013 may be claimed on either the 2012 or 2013 income tax returns of the taxpayer.

The final credit is the Credit for Contributions to Charitable Organizations that Provide Assistance to the Working Poor.  The maximum amount of this credit is $200 for single taxpayers or heads of household and $400 for married taxpayers filing a joint return.  The donations must be made to a qualifying charity, which is essentially a charitable organization that is exempt from taxes under the Internal Revenue Code, Section 501(c)(3) and that allocates at least 50% of its annual budget on services to Arizona residents who receive Temporary Assistance for Needy Families benefits.  Unlike the school tax credits, the taxpayer must itemize deductions in the year of the contribution in order to qualify for this credit.

These credits are considered to be non-refundable, which simply means that they can reduce the taxpayer's total Arizona income tax to zero, in which case the taxpayer would receive a full refund of all income taxes withheld or paid to the state for the year.  However, if the credit exceeds the total amount of the taxpayer's Arizona income taxes for the year, they will not receive a refund of the excess amount of the credit. 

This is just a brief overview of these credits.  You should alwasy consult your tax advisor for the applicability of these credits to your particular situation or give us a call at (520) 795-7195 for more information.

2 comments:

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