Incentives Watch: How Do States Encourage Taxpayers to Support Education?


Although the U.S. education system is one of the best in the world, White House archives reveal that four-year degree attainment in the country dropped from first in the world in 1990, to twelfth in 2016. Statistics comparing wages earned by those with varying levels of education points to one of the benefits of getting a college degree. According to the National Center for Education Statistics, the average earnings of young adults who finished high school was $30,500, compared to $50,000 for those with a college degree, and $60,000 for those who completed a master’s degree.

One of the ways states encourage students to stay in school is to provide tax credits and incentives. There are currently 18 states offering tax credits for education purposes. A few of these are highlighted below.

Arizona

Arizona offers two nonrefundable tax credits to individuals that contribute to a Certified School Tuition Organization; designed to provide scholarships for students enrolled in Arizona private schools. One of these is the Credit for Contributions to Private School Tuition Organizations, which allows a credit of up to $555 for single, heads of household, and married filing separate filers and $1,110 for married filing joint filers. This credit is claimed on Form 323. Arizona also offers the Credit for Contributions to a Certified School Tuition Organization, which is a tax credit for individuals who contribute to a private school tuition organization which provides scholarships or grants to qualified schools. This credit is available to individual taxpayers who donate the maximum amount allowed under the Credit for Contributions to Private School Tuition Organizations, and make an additional donation to a Certified School Tuition Organization. This credit is claimed on Form 348.

In 2018, the maximum amount of the credit is $555 for single taxpayers or heads of household, and for married taxpayers filing a joint return, the credit is currently $1,092. If the allowable tax credit is more than the tax owed or if there is no tax due, the credit may be carried forward for up to five consecutive taxable years’ income tax liability.

In addition, schools cannot discriminate on the basis of race, color, handicap, familial status, or national origin and requires all teaching staff and personnel that have unsupervised contact with students to be fingerprinted. A qualified school does not include a charter school or programs operated by a charter school. The primary school must begin with kindergarten and the secondary school must end with grade 12.

Iowa

Taxpayers in Iowa who donate money or a non-cash contribution to a school tuition organization are eligible for a credit against their income tax. The contribution cannot specify a beneficiary of the funds, and the taxpayer cannot take a charitable deduction for the amount donated. The credit is equivalent to 65 percent of the voluntary cash or non-cash contribution made to an organization. Taxpayers can contribute any amount, up to the annual aggregate amount of the credit. The current aggregate annual amount of allowable tax credits is $12 million; this will increase to $13 million for 2019.

The school tuition organization issues tax credit certificates to each taxpayer who makes a cash or non-cash contribution to the school tuition organization. The taxpayer must include the tax credit certificate with the tax return for which the credit is claimed. Any credit in excess of the tax liability for the tax year may be credited to the tax liability for the following five years or until used, whichever is the earlier. The taxpayer may not claim a deduction for charitable contributions for Iowa corporation income tax purposes for the amount of the contribution made to the school tuition organization. To be eligible for a tuition grant, a student’s family income must be no more than 300 percent of the federal poverty guidelines.

Louisiana

Louisiana offers a Tuition Donation Credit which provides tax credits to taxpayers that donate to tax-exempt, nonprofit organizations that provide scholarships to low-income students. To be eligible for a scholarship, students must: (1) have attended a public school in Louisiana on October 1 and February 1 of the most recent school year; (2) be entering Kindergarten for the first time; or (3) have participated in the Louisiana Scholarship Program/Tuition Donation Program for the previous school year. Students must apply directly for enrollment to a participating school.

Scholarships cannot exceed the lesser of either: (1) the school’s tuition and mandatory fees; or (2) 80 percent of the state average per pupil funding for elementary and middle school students (approximately $4,200) and 90 percent of the state average per pupil funding for high school students (approximately $4,700). The credit is claimed on the taxpayer's Louisiana income tax return. The credit cannot be applied until the Louisiana Department of Education issues a receipt through the school tuition organization. Taxpayer must have the receipt on or before the due date of the return in order to claim the credit for the preceding year. Taxpayers must attach Form R-10604 (can we hyperlink this?), Receipt for Donations to School Tuition Organization Tax Credit to taxpayer's Louisiana income tax return.

South Carolina

The Educational Credit for Exceptional Needs Children is a nonrefundable credit that was created by the South Carolina Legislature to provide scholarships for students to attend an approved independent school that best serves their needs. Individuals and corporations who pay South Carolina taxes can donate to the fund and claim a tax credit against their income tax liability. Donors can also deduct contributions made to the fund on their federal income taxes, up to a maximum 60 percent of their total state tax liability for the year the contribution was made. The fund is limited to an annual statewide cape of $12 million for 2018.

Education tax breaks can provide help to students and families and are worth investigating.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are education-related credits available in your state?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.