CPA: Tax credits reduce your liability dollar-for-dollar

By James A. Chaston, CPA

With the increase in the standard deduction only about 12% of taxpayers will itemize and be able to write off mortgage interest, state taxes, medical and charitable deductions.

That doesn’t mean you shouldn’t donate to charities. The State of Arizona has some tax credit programs that allow you to choose how your tax dollars get used. The following Arizona tax credits reduce your tax liability dollar for dollar. Every dollar you give to the “qualified” charities reduces your taxes by a dollar. You don’t lose any money; just decide where it goes, and your chosen charity gets that additional funding. If you understand this, you will always
take advantage of it. Here are the Arizona state tax credit programs that you can participate in.

• Public Schools Credit
• Private School Tuition Organization
• PLUS Private School Tuition Organization
• Arizona Charities Credit
• Foster Care Credit
• Military Family Relief Fund

In addition, if you itemize your deductions on your federal return you can also take a deduction for these donations.

Here’s how it works. You give $400, the maximum for a married filing joint tax return, to a public school for something that qualifies for the credit. Then, when you file your tax return, you either get that $400 back or your liability is reduced by $400 from the State of Arizona, assuming you have that much in
liability. If you are in the 22% tax bracket for federal income taxes, you save $88 or 22% of the $400 donation from your federal taxes. The result is you give your public schools $400 and get $488 back from the government.

You combine all the credits at the maximum if you file jointly and itemize, and you could get up to $5,940 back from the government while giving $4,869 to your choice of schools and charities depending on your tax bracket (limit for filings other than jointly is $2,435). The overall limit of state tax credit you can claim this year is your state tax liability.

Example: You generated an Arizona tax liability of $5,000, you had $4,800 withheld from your wages, so normally you would owe $200 when you file your tax return. If you make the donations of $4,869, it would reduce your tax liability from $5,000 to just $131 and you would get a refund of $4,669, essentially getting your $4,869 back.

Then you would also get the $4,869 as a deduction on your federal return increased your refund or decreasing what you would owe.

Here’s a closer look at these credits. The credit for a “qualifying charitable organization” is one that spends at least 50% of its budget on services to Arizona residents who receive temporary assistance for needy families’ benefits or are considered low-income households. There is also an additional $500 and $1,000 credit if you give to a qualifying Foster Care Organization. Check AZDOR.gov/sites/default/files/CREDITS_2019_qco.pdf for the most current list of qualifying charities. You must itemize deductions to claim the credit.

The credit for contributions made or fees paid to a public school must be made in support of extra-curricular activities or for character education programs. Fees paid to the school for your own child qualify for the credit. Also, you can just make a general donation whether you have children in the school district or not.

The annual credit limit for someone filing single or head of household is $200 and $400 for a couple filing jointly.

The private school tuition credit must be made to a tuition organization that provides scholarships or grants to qualified schools. Again, anyone can make a donation whether they have a child in the school or not. Most private schools have tuition organizations set up to handle these donations. A good list of
these organizations can be found at AZDOR.gov/sites/default/files/REPORTS_2019_sto-ilist.pdf. The annual credit limit for someone filing single or head of household has increased to $569 for single and $1,138 for a couple filing jointly.

These are non-refundable credits, they offset tax liabilities and allow your withholding to be refunded. Any unused credits may be carried over to future years.

There are several other credits, but many of them are specific to certain circumstances and you should consult your tax advisor to see if you qualify for those credits and your applicability to the credits discussed above.

The donation deadline for these donations for tax year 2019 is April 15, 2020. But make them before December to get the federal write-off also.

James A. Chaston, CPA
520-568-3303 Office
602-617-2449 Mobile
21300 N. John Wayne Parkway, Suite 110