Education Improvement Scholarship Tax Credits

Written by Rick Huff

Most of us are aware there are obscure, little-known tax provisions that we’re probably not taking advantage of. Some of us even wish we knew more about various tax intricacies so we could keep more of our dollars from going to our friends at the federal and state treasuries.

There is one Virginia Tax credit that would benefit almost everyone in some form or fashion. Get ready, it is a mouthful. It is the Education Improvement Scholarship Tax Credits.

Here is what you need to know about Education Improvement Scholarship Tax Credits

The Education Improvement Scholarship Tax Credit is a relatively unknown provision in the tax code of Virginia. However, it is getting more attention and deservedly so.

For certain tax-exempt foundations of private schools in Virginia, a contribution can garner you a Virginia tax credit along with possibly a charitable deduction on your federal return and a deduction on your Virginia state return

You always receive a 65% credit on your Virginia state return from this credit. Receiving the benefits of a charitable contribution on your federal and state return depends on how much you have or don’t have in itemized deductions.

Due to the tax act in December 2017, we now have new ceilings for standard deductions; couples get a standard deduction of $24,000 while singles have a standard deduction of $12,000. If 65 and older or blind, there is a slight increase in that standard deduction.

Why is this important?

The purpose of the credit is to provide more dollars to underwrite the private school education of disadvantaged students.

Here’s how it works. The school’s foundation receives contributions; they, in turn, must distribute the dollars to the school for the education of the lower-income students.

It is a win-win-win for everyone involved. The schools receive dollars to fund their operation. The donor always receives the tax credit, and depending on the situation, may also receive an income tax deduction on their federal and state returns. The State of Virginia saves money because the difference between the lost tax revenue and the amount they normally pay to help educate a student in a public school is a net gain for them.

The truly amazing fact is a donor may end up with more tax savings than their actual contribution. This is possible because a donor may get a federal and state income tax deduction along with always getting a state income tax credit.

It all depends on your situation.

Always remember and never forget – a tax credit is worth more than a tax deduction.

I have calculated a good number of tax projections; and depending upon the situation, the donor could end up with a greater reduction in their tax liability than the contribution. At a recent presentation, several donors personally confirmed this benefit. To emphasize again, it all depends on your situation.

Be aware, this is not a ‘do it yourself’ activity. It is not the same as writing a check to your church or a favorite charity. While the process is certainly a multi-step activity, the respective foundations will be more than happy to hold your hand and guide you through the sequence of steps.

And there are a few additional caveats; to participate, individuals must contribute at least $500 and not exceed $125,000. A contribution from a business has no ceiling. If you contribute to a foundation that benefits a number of schools under their umbrella, you may designate a specific school but you can never direct funds to a specific student.

To find more information on this type of tax credit, you may want to peruse the following websites:

Virginia Department of Education 

renewanation

Virginia Alliance for Student Opportunity 

If you have a soft spot in your heart for children, grandchildren or even neighbor kids attending a private school that you identify with their mission and values, inquire if the school has a foundation that provides Education Improvement Scholarship Tax Credits to donors. Talk to your tax preparer, financial planner or tax advisor and have them ‘run the numbers’ and give you an estimate of tax savings. You will probably find you could walk away with a boatload in tax savings as well as ‘doing good’.

If you’re considering strategic tax planning, reach out to our team, and we’d be happy to review your situation.