Your donation to Yumas Education Scholarship Fund for Kids Inc. will not only assist students with their educational needs, it will also improve your bottom line. With the Arizona Private School Tuition Tax Credit, your donation will generate a real return on your state income taxes.
It’s simple: Yumas Education Scholarship Fund for Kids Inc is a 501(c)3 organization that qualifies for the School Tuition Tax Credit. When you make your donation to YES Fund for Kids, you can receive a dollar-for-dollar tax credit on your Arizona state return – up to $1,219 for individuals and $2,435 for those filing jointly in 2021.
The state of Arizona provides a variety of individual tax credits, including the Private School Tuition Tax Credit and credit for contributions to Certified School Tuition Organizations. These tax credits allow taxpayers to make charitable contributions and receive dollar-for-dollar reductions in their Arizona state tax liabilities.
You have probably heard the phrase Tax Credit, but don’t know all the details about them. Most taxpayers do not know how to take full advantage of Arizona’s state tax credits, including the ability to combine multiple tax credits and carry forward the tax benefits over several years.
Here is a comprehensive guide to Arizona Tax Credits. Taxpayers will find everything they need to know in order to take advantage of this and other Arizona state tax credits. We suggest that you not only read this informational guide, but also consult with your tax advisor for advice on you specific tax situation.
The 2021 Guide to The Arizona Private School Tuition Tax Credit
1. Understanding the Arizona Private School Tuition Tax Credits
What are the Arizona Private School Tuition Tax Credits?
- The Credit for Contributions to Private School Tuition Organizations, otherwise known as the Original Private School Tax Credit, is a nonrefundable individual income tax credit for charitable contributions to private school tuition organizations (STOs) that provide educational scholarships to private school students. This credit is only available for individuals (corporations, partnerships, etc., are not eligible). The 2021 tax year maximum allowable credit for contributions to private schools is $1,221 for married filing jointly filers, or $611 for single, married filing separately, and heads of household filers. This tax credit is available for cash contributions, and is claimed on Arizona Form 323. Taxpayers can claim charitable contributions to Private school Tuition Organizations made through payroll withholding, and this tax credit has a five year carryover period.
- The Credit for Contributions to Certified School Tuition Organizations, also know as the Switcher Individual Income Tax Credit, is available for individual taxpayers who not only claim the maximum allowable credit on Arizona Form 323 for the Credit for Contributions to Private School Tuition Organizations, but also make an additional charitable donation to a Certified School Tuition Organization (STO). The maximum allowable credit for this specific tax credit is $1,214 for married filing jointly filers, or $608 for single, married filing separately, and heads of household filers. This tax credit is available for cash contributions, and is claimed on Arizona Form 348. Taxpayers can claim charitable contributions made through payroll withholding for the purposes of this tax credit, and there is a five year available credit carryover.
Guidelines for the Arizona Private School Tuition Tax Credits
Here are some general guidelines for using the Arizona Private School Tuition Tax Credit and Switcher Tax Credit. Please consult your tax advisor for specific tax advice relevant to your tax situation.
- Donations must be made by individuals (corporations, foundations, partnerships, etc. do not qualify).
- Donations must be made in cash (property donations and services do not qualify).
- Donations must be made to a Qualified School Tuition Organization (STO) that has been certified by the state of Arizona.
- Credits that are not applied to tax obligations for the current tax year can be carried forward to future tax years.
How Do the Arizona Private School Tuition Tax Credits work?
The process for making a charitable contribution and claiming the Arizona Tax credit is relatively straightforward. There are four steps to document your donation and claim your tax credits.
- Donate to a certified school tuition organization (STO), such as a 501(c)(3) organization like Yumas Education Scholarship Fund for Kids Inc
- Maintain a receipt of your donation from the organization, in order to provide a copy with your tax return.
- Complete the relevant tax form to claim one or more credits for your donation(s): Arizona Form 323 for donations to the Private School Tax Credit, and/or Arizona Form 348 for additional amounts donation to the Switcher Tax Credit. Most tax programs will supply these tax forms.
- Calculate your individual tax return (e.g. Arizona Form 140, 140NR, 140PY, or 140X), subtracting your tax credits from your tax liability, in order to reduce your Arizona state tax balance. Include Arizona Form 323 and Arizona Form 348 with your tax return.
For example if a married couple owes $2,550 in taxes but donates $2,435 to a qualified STO, their tax liability is reduced to $115.
Utilizing the Arizona Private School Tax Credits through payroll withholding
Are you interested in an easier way to give to your favorite qualifying organization? On both Arizona Form 323 and Arizona Form 348, you are permitted to record charitable contributions made through payroll withholding, provided that your employer is able to withhold contributions to eligible Arizona Charitable Tax Credit organizations from your pay. Be sure to contact your employer prior to setting up donations through payroll withholding.
How the Arizona Private School Tax Credits shifts control to taxpayers
The Arizona Private School Tax Credits give taxpayers more choice in how their tax dollars are allocated. Consider the example of the married taxpayer who makes a $2,435 donation to an eligible STO. The taxpayer then claims the maximum allowable credit for these these contributions (the $1,221 maximum tax credit for the Original and $1,214 for the Switcher), reducing their state tax liability, dollar-for-dollar. The taxpayer has effectively redirected $2,435 of their State tax payment from the State’s general fund to the charitable organization of their choice. This is the underlying benefit of the Arizona Charitable Tax Credit – it shifts control away from the State and gives individuals the power to determine which deserving organizations will receive tax revenue. Taxpayers themselves can direct tax dollars to charities whose services they believe provide the most value to their local communities.
2. Limits to the Arizona Private School Tax Credits
Maximum dollar allowable credits
The 2021 tax year maximum allowable Original credit for contributions to private schools is $1,221 for married filing jointly filers, or $611 for single, married filing separately, and heads of household filers. The maximum allowable credit for the Switcher tax credit is $1,214 for married filing jointly filers, or $608 for single, married filing separately, and heads of household filers. Contribution to both tax credits may be combined. All contributed amounts must be claimed under the Original tax credit up to the maximum before amounts are considered for the Switcher tax credit.
Minimum dollar requirements for the Arizona Private School Tax Credits
Donors often wonder whether they can receive tax credits under the Arizona Private School Tax Credit for smaller amounts donated, especially when they want to support a student but are not able to donate hundreds of dollars. There is no minimum dollar requirement for the Arizona Private School Tax Credits. Charitable contributions to STOs do not have to exceed a minimum dollar threshold. Monthly contributions are often a way of giving for some taxpayers.
Five Year Carry Forward Period
The Arizona Private School Tax Credit permits any credits for contributions to STOs that are not applied against tax obligations for the most recent taxable year to be carried forward for a period of five consecutive years. A taxpayer may only carry over the portion of the credit that the taxpayer did not apply to their tax. An amount over the maximum credit amounts allowed may not carry over as a credit.
Arizona State Tax Credits cannot exceed a taxpayer’s current tax liability
This is a nonrefundable credit and therefore the total amount of available credit (including any carryover amounts) that a taxpayer may use for the taxable year cannot be greater than their tax liability. Tax credits from the Arizona Private School Tax credit can only be applied to a taxpayer’s current Arizona state tax liability. The tax credits cannot be used to receive money back from the State of Arizona. Depending on the amounts withheld through a taxpayers employer, the taxpayer typically sees a greater State tax refund.
Arizona Standard Deduction Adjustments
In 2019, the passage of Arizona HB 2757 introduced adjustments to Arizona’s standard deduction amounts, aligning them with the federal standard deduction. The standard deduction amounts were increased for both single and married taxpayers. Arizona HB 2757 stipulates that “the Arizona standard deduction can be increased by 25 percent of the charitable deductions the taxpayer would have claimed if they had itemized their deduction,” according to Ed Greenberg of the Arizona Department of Revenue. This increase ensures that taxpayers who would have otherwise donated and claimed those gifts while itemizing their tax deductions will still be incentivized to make charitable contributions
3. Eligible Organizations for the Arizona Private School Tax Credit
The Arizona Department of Revenue (ADOR) provides tax credits for contributions made to Certified School Tuition Organizations which provide scholarships to students enrolled in Arizona private schools (A.R.S. Title 43, Chapters 15 and 16). A nonprofit organization in this state that is exempt from federal taxation under section 501(c)(3) may apply to ADOR for certification as an STO. Once certified, an STO may receive tax credit donations from individual and/or corporate taxpayers. Requirements for an STO to be eligible for and retain certification for receiving tax credit donations:
- The STO must allocate at least 90% of its annual tax credit contributions to scholarships;
- The STO shall not limit the availability of scholarships to students of one school;
- The STO must allow ADOR to verify that the scholarships issued are awarded to students attending a qualified school;
- The STO must not knowingly collude with any other STO to circumvent the limits of the low-income corporate scholarship;
- The STO may allow donors to recommend student beneficiaries but shall not award, designate, or reserve scholarships solely on the basis of donor recommendations;
- The STO shall not allow donors to designate student beneficiaries as a condition of any contribution to the organization;
- The STO shall not facilitate, encourage or knowingly permit the exchange of student beneficiary designations (i.e. swapping);
- The STO shall include on the organization’s website the percentage and total dollar amount of educational scholarships and tuition grants awarded during the prevoius fiscal year to (a) students whose family income is up to 185% of poverty level and (b) students whose family income is greater than 185% of poverty level but not more than 342.25% of poverty level;
- The STO must not award scholarships to students who are simultaneously enrolled in a district school or charter school and a qualified school;
- The STO shall follow all other statutory requirements in A.R.S. SS 43-1089, 43-1089.03, 43-1089.04 or Title 43, Chapter 16;
- The STO shall follow all other statutory requirements in A.R.S. SS 20-224.06, 20-224-07, 43-1183, 43-1184 or Title 43, Chapter 15.
Yumas Education Scholarship Fund for Kids Inc is a 501(c)(3) organization that meets the state of Arizona’s STO certification requirements, qualifying the organization to receive charitable contributions under the Credits for Contributions to Certified School Tuition Organizations. Each year the Arizona Department of Revenue updates its list of STOs certified to receive donations.
4. Deadlines and Key dates for the Arizona Private School Tax Credit
The state of Arizona allows taxpayers to claim a tax credit for donations made through April 15 of the current year for the prior tax year. The state does require donations from different calendar years to be listed separately on Arizona Form 323 and Arizona Form 348. For the tax year 2021, contributions that are made between January 1,2021 and December 31, 2021 are to be listed separate from those contributions made between January 1, 2022, and April 15, 2022.
IRS deadlines are different from Arizona’s state deadline. The IRS specifies that, in order for contributions to be deductible on federal tax returns, contributions must be made by December 31.
5. Additional Arizona State Tax Credits that you need to know about
The state of Arizona offers additional state tax credits that allow taxpayers to contribute to a variety of charitable organizations and specify how a portion of their tax dollars are allocated. Note that these tax credits are independent, so taxpayers can take advantage of multiple tax credits on the same tax return.
- The Arizona Charitable Tax Credit is a set of two nonrefundable individual income tax credits for charitable contributions to Qualifying Charitable Organizations (QCOs) and Qualifying Foster Care Charitable Organizations (QFCOs). The maximum allowable credit for contributions to QCOs is $800 for married filing jointly filers or $400 for single, married filing separately, and heads of household filers. The maximum credit for contributions to QFCOs is $1,000 for married filing jointly or $500 for single, married filing separately, and heads of household filers. These tax credits provide dollar-for-dollar tax benefits, allowing taxpayers to reduce their state tax liability for each dollar donated to charities, up to the maximum allowable limits. The QCO tax credit dates back to 1998 and used to be called the “Working Poor Tax Credit”. In the tax year 2012, this credit was expanded and now is part of the Arizona Charitable Tax credit umbrella term that is used to describe the tax credits for gifts to both QCOs and QFCOs. The deadline for this tax credit is April 15.
- The Public School Tax Credit is a nonrefundable credit for cash contributions to Arizona public schools. These funds can be utilized for extracurricular activities including sports, art, and music. The maximum allowable credit for contributions to public schools is $400 for married filing jointly filers, or $200 for single, married filing separately, and heads of household filers. This tax credit is claimed on Arizona Form 322. The deadline for this tax credit is April 15.
- Additional Arizona State Tax Credits are offered for individual and business tax credits. Visit AZdor.gov/tax-credits for more information, and see Arizona Form 301 for an extensive list of Arizona’s state tax credits.
6. Tax Credits VS. Tax Deductions
Credits and deductions differ in how they impact an individual’s tax obligation.
A tax credit reduces an individual’s tax liability (or the total amount of tax debt owed to the government) on a dollar-for-dollar basis. For every dollar an individual claims as a tax credit, their tax obligation is reduced by a dollar. A tax deduction reduces an individual’s taxable income. For every dollar an individual claims as a tax deduction, their taxable income is reduced by a dollar. Based on the calculation from their income bracket, the individual pays a tax on the amount left over after deductions are subtracted.
Consider the example of the married taxpayers with $85,000 in taxable income and an effective Arizona State tax rate of 3% (rate is for example only and may not represent the current tax rate). In this example, the taxpayer’s Arizona state tax liability is approximately $2,550 (3% of $85,000).
Now let’s assume this married couple has donated $2,435 to YES Fund for Kids; then they take the $1,221 maximum allowable tax credit for the Original donation, and the $1,214 maximum allowable tax credit for the Switcher donation. In this example, these two tax credits would reduce the taxpayer’s liability by $2,435 ($1,221 + $1,214), from $2,550 to $115. The taxpayer would end up paying $115 to the State of Arizona.
Now let’s consider the implications of two equivalent tax deductions for the same taxpayers. In this example, assume the individual makes the same donation amounts, except in this case the donations are made directly to a private school or other charity that has not been certified as a qualified School Tuition Organization by the State of Arizona. In this example, the tax deductible donation would reduce the taxpayers taxable income by $2,435, from $85,000 to $82,565. After applying the 3% effective tax rate to the $82,565 of taxable income, the taxpayer’s liability would be $2,477, resulting in a higher payment to the state of Arizona.
Recent Federal regulations on charitable contributions and state and local tax credits
In August 2018, the IRS and US Department of Treasury proposed new regulations aimed toward limiting federal tax deductions for charitable gifts for which taxpayers also plan to claim state and local tax credits. Although complicated, the new regulations require that individual taxpayers now have to reduce any corresponding federal tax deductions by these credits to be taken on their Arizona tax form.
7. Relevant Contact Information for the Arizona Private School Tuition Tax Credit
Arizona Department of Revenue provides two phone numbers for inquiries about Arizona Form 323 and Form 348 with regards to credits for contributions to STO’s.
- From within the Phoenix metro area, call: (602) 255-3381
- From area codes 520 and 928, toll-free (800) 352-4090
More information regarding tax credits, as well as tax forms can be found on the Arizona Department of Revenue website.
For specific tax advice, please contact you CPA or tax preparer.
8. Key Point for the Arizona Private School Tax Credit
In summary, Arizona taxpayers have many options when it comes to utilizing state tax credits to reduce their Arizona state tax liabilities. Donating to the state-certified charitable organizations of your choice, and utilizing Arizona’s state tax credits to control how a portion of your tax dollars are spent just makes sense. Please consider donating to Yumas Education Scholarship Fund for Kids Inc, a 501(c)(3) organization that qualifies for the Arizona Private School Tax Credits as a state-certified qualified School Tuition Organization. Your donation helps with tuition scholarships for many students attending qualified private schools in Arizona.