If you live in a state that supports Scholarship Granting Organizations (SGO) and some portion of your charitable giving is directed to K-12 private schools, you could have the makings for a beautiful partnership. Seventeen states now offer scholarship tax credit programs that allow both individuals and corporations to earn additional tax credits as a result of their gifts.
One success story can be found in the state of Indiana. In its first ten years since its inception in 2009, Indiana’s Scholarship Tax Credit program had provided more than $45 million dollars to over 35,000 students in more than 300 private schools statewide. For people who already make charitable contributions to an Indiana K-12 private school, routing those donations through an SGO could save big money at tax time.
First, it’s important to note that SGO contributions do not fund vouchers and are not associated with other school voucher programs. Rather, the School Scholarship Tax Credit Program was created to accept donations from individuals and corporations who wish to fund need-based K-12 scholarships in exchange for state tax credits. Here’s how they work. Each school year, participating states’ Departments of Revenue set aside a pool of tax credits specifically for the Tax Credit Scholarship program. Tax credits are allotted on a first-come, first-served basis. Once all credits have been claimed, no more will be allotted until the next fiscal/school year. Indiana is currently offering $18.5 million in tax credits, which became available on July 1, 2022.
To participate, donors make contributions to an SGO which allocates the money among their affiliate schools, which deliver the funds to students as scholarships. To be eligible for program scholarship money, students must be a member of a household with an income below 300% of the amount necessary to qualify for the reduced lunch program. Decisions regarding scholarship distributions are made at the school level, and while donors may not earmark their contributions for a specific student, they can direct their dollars to a specific school.
The SGO will provide reporting information back to donors, verifying eligibility for the tax credit. There is no minimum or maximum donation amount to participate.
It is typical for these credits to run out long before the deadline, and here’s why. In addition to the potential federal tax deduction for charitable contributions made directly to a private or parochial school, donations to an SGO also earn a 50% state tax credit. In certain situations, routing charitable contributions through an SGO could result in a scenario like this:
Without SGO: Henry gives $10,000 to his local parish school and gets a 25% deduction on his federal tax return. The school gets $10,000, and Henry’s net contribution after his tax deduction is $7,500.
With SGO: Instead of donating directly to the school, Henry contributes $10,000 to the SGO that supports his parish school. The school still gets $10,000, and in addition to Harry’s federal tax deduction, he also receives a 50% state tax credit. This brings Henry’s net contribution down to just $2,500 (scenario for reference purposes only). While other tax factors will influence the exact accounting and results will not be the same for every taxpayer, “With SGO” illustrates the best potential outcome of the School Scholarship Tax Credit Program.
Currently, there are seven Certified SGOs in the state of Indiana. More information about the organizations and the specific schools supported by each SGO is available at the Indiana Department of Education website: DOE: Indiana Choice Scholarship Program. Additionally, the site lists a running total of remaining tax credits for the fiscal year, and many of the participating school organizations also provide information and forms via links to these pages.
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.