Georgia offers multiple tax incentives for businesses and several for individuals. Some of the most popular ones available to individual filers are an education credit for private school scholarships and a film credit; joining them now is an additional education-related tax credit, this one assisting public schools. While the programs vary, each holds the potential to reduce tax liabilities for certain Georgia taxpayers.
The Qualified Education Expense Credit (QEE, a/k/a Georgia Apogee) and the Qualified Education Donation Credit (QED) allow taxpayers to support education in the state while receiving tax benefits by converting what would otherwise be state income tax payments into charitable donations. Rather than making a tax payment to the state, taxpayers instead make donations to specified organizations that provide scholarships to certain private schools or grants for certain public schools. These donations become both a Georgia income tax credit directly offsetting a taxpayer’s Georgia income tax liability and a charitable contribution itemized deduction.
Before the 2018 federal tax law changes under The Tax Cuts and Jobs Act (TCJA), generally only taxpayers paying Alternative Minimum Tax (AMT) were able to realize an income tax benefit from participation in the Georgia Apogee/QEE program. State income taxes are an addback for purposes of determining AMT liability; the tax benefit for paying state income taxes is often significantly limited by those paying AMT. Thus, a conversion of a state income tax payment into a charitable contribution is valuable to an AMT taxpayer, whereas a non-AMT taxpayer would generally have received a tax benefit for either a state income tax payment or a charitable contribution if deductions were itemized. Further, given that the credit must be applied for and granted in advance of knowing that year’s AMT status, contributing to the GA Apogee/QEE program has historically been more about supporting Georgia’s education system and less about the related tax benefits.
The scenario is quite different as a result of TCJA. Under the new federal tax laws, state and local income taxes (SALT) are added to property taxes with the resulting total deductible only to the extent it does not exceed $10,000 per tax return (SALT limit). The new law enables significantly more taxpayers who itemize deductions to benefit from converting state income tax payments into charitable contributions, regardless of their AMT status.
In addition, with a second credit available beginning 2018, Georgia taxpayers can combine the credits to yield hundreds if not thousands of dollars in tax savings. While the potential for saving can be significant, it’s important to assess whether and how much you can benefit from the credits before making a decision. Here’s what you need to know:
- Only filers who itemize will save. Taxpayers who don’t itemize deductions will not realize a tax savings. Although these taxpayers will still receive a credit on their Georgia tax return, there will be no tax benefit to the charitable contribution component.
- The SALT limit must apply. Taxpayers whose combined SALT deductions don’t reach the $10,000 limit actually generate negative cashflow by using the credit. For example, let’s say your combined real estate taxes and state income taxes total $8,000 and you contribute $1,000 to an education credit program to receive a $1,000 credit. Assume you make no other charitable donations. Now your SALT deduction is $7,000 and your charitable contribution deduction is $1,000, for a total of $8,000. As you weren’t capped on your SALT deduction, your federal income tax liability remains unchanged, i.e., you have $8,000 of allowable itemized deductions in either scenario. However, on the state level, you must add back the $1,000 to your Georgia taxable income since you’re receiving a tax credit for it. Assuming a 6% tax rate, this generates $60 in additional Georgia tax. As a result, you’ve spent $1,060 (contribution + tax) to get a $1,000 credit.
- Education credit amounts are capped. For the QEE or QED credits, individual filers and heads of household can claim up to $1,000, while those married filing jointly can claim up to $2,500. Married individuals filing separately have a limit of $1,250. All individuals claiming the credit are further limited by their actual tax liability; credit amounts that exceed the year’s Georgia income tax will not be refunded, but they can be carried forward for up to five years. These credits are not mutually exclusive; both the QEE and QED can be received by the same taxpayer up to the maximum allowable/granted.
- C corporations, fiduciaries and passthrough entities can participate. C corporations and trusts may utilize the education credits in an amount up to 75% of income tax liability. C corporations and trusts also have the ability roll over any unused portions of their purchased credits to use against state income taxes over the next five years. Members of a partnership or LLC and shareholders of an S corporation may use the credits in an amount up to $10,000 or the full amount of their Georgia income tax, whichever is less. Unlike C corporations, these taxpayers are not permitted to carry forward any excess credit amount into a future year. The credit is claimed on the owner’s personal tax return.
- The number of credits available is limited. The state annually caps total education credits for all taxpayers. Completing the application process sooner rather than later ensures a better chance that you’ll receive the credit. Applications for 2019 Apogee/QEE credits will be accepted starting June 1, 2018. Applications for the 2018 QED credit are being accepted currently.
The Georgia Film, Television and Digital Entertainment Tax Credit is a popular incentive that has helped increase film production activity within the state. To utilize the film credit, a taxpayer must purchase the credit through brokers, a transaction that is generally facilitated by a CPA. This credit is typically only cost-effective and available for taxpayers with high Georgia tax liabilities.
Here’s how Film Tax Credits work: Production companies generate the credit by spending money in Georgia on production activities. As they may often not have income tax liabilities of their own, these companies sell the credits to brokers who then resell them to Georgia taxpayers at a discount. This discount represents the savings to a particular taxpayer. For example, you purchase $30,000 of tax credits for $27,900; your benefit is $2,100. (Note that you won’t actually receive the full $2,100 benefit because this amount will be taxed as capital gain; the IRS considers it ‘receiving something for nothing’ and therefore subject to tax.)
Between the currently high credit prices and the capital gains hit, the net tax benefit is available only to taxpayers with significant Georgia tax liabilities. Although the price of the credit factors in heavily, taxpayers with Georgia tax liabilities of under $15,000 might not receive enough of a benefit to warrant purchasing and the credit and, indeed, may find they’re not able to purchase depending on how the credit sales are structured at that time. Additionally, taxpayers will need to be able to pay for the credit in one lump sum whereas estimated tax payments and withholding allow for staggered payments.
These three state credits can offer meaningful tax savings, but only to Georgia taxpayers who fit the right profile. If you’re interested in any of these credits, please contact Atlanta Tax to discuss and quantify your potential tax savings.