Want Triple Tax Benefits? Donate to Scholarship-Granting Organizations

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(Image courtesy of Bedel Financial Consulting Inc.) (Image courtesy of Bedel Financial Consulting Inc.)

How would you like to give $10,000 to your favorite school for a financial aid scholarship, while only spending $300 of your own money? This may sound too good to be true, but thanks to Indiana's School Scholarship Tax Credit Program administered through the Department of Revenue (DOR), it's possible. And it's making some Indiana students' dreams of a private education a reality!

Indiana's School Scholarship Tax Credit Through SGOs

Indiana's tax credit is available to individuals or corporations that donate to a scholarship-granting organization approved by the Indiana Department of Education. Donors will be eligible to receive a 50 percent tax credit against their individual or corporate state tax liability.

These SGO scholarships are given to families who qualify for financial need based on an income threshold. So, the money is only going to families in need of financial assistance. Your donation may send someone to a private school who would otherwise never be able to afford it, while also helping to create greater diversity within our education system. Added bonus? As a proud alumnus of a qualifying educational institution, you can provide private school scholarships to deserving students!

Your Triple Tax Benefit

Under the current rule, not only do you receive a 50 percent Indiana state income tax credit, but you can also deduct the entire contribution amount on your federal tax return as a charitable deduction. But let's take it one step further. Through the SGO program, you are allowed to gift appreciated stock, which creates a triple-threat tax savings strategy.

For example, let's assume Ted gifted $10,000 of appreciated stock. Here's how it works:

Total Stock Value: $10,000 with cost basis of $5,000

Stock with 100 percent unrealized capital gain

$5,000 Indiana income tax credit

50 percent of $10,000 = $5,000

$3,700 of Federal tax savings, since Ted is in the highest tax bracket of 37 percent

$10,000 x 0.37% = $3,700

$1,000 in long-term capital gains savings from stock gift

$5,000 of unrealized gains x .20% = $1,000

Total Savings = $9,700

As you can see, a $10,000 gift to a qualified SGO, which will be used in funding financial aid scholarships for income eligible families, would ultimately cost Ted only $300.

On August 23, 2018, the IRS proposed regulations that would require taxpayers to reduce their federal charitable tax deduction to the extent the taxpayer receives a state or local tax credit in connection with the charitable contribution. The proposed regulations would apply to contributions made after August 27, 2018.

If approved, this regulation would reduce Ted's federal benefit by half - from $3,700 to $1,850. Even then, he'd enjoy an overall tax savings of $7,850. Still a great deal, thanks to our supportive governors and legislators who have continued to support this program since 2009.

Better Hurry to Take Advantage of This Triple Tax Break!

If you're interested in benefiting from this gifting strategy, you need to be aware that the state of Indiana has allocated $14 million in total tax credits, with benefits available on a first-come-first-served basis. The state's fiscal year runs from July 1, 2018, through June 30, 2019. It's still early, but less than two months into the fiscal year $2.65 million credits have already been allocated to donors. To find a list of eligible institutions, gifting instructions, and more information about the program, click here.

Summary

Our Indiana legislators, along with the Department of Revenue and Department of Education, are doing a wonderful service by incentivizing Indiana tax payers with a 50 percent tax credit when they donate to eligible SGOs. The program supports students and families in financial need while financially rewarding donors. Indiana’s School Scholarship Tax Credit Program is a win-win for everyone!

Evan D. Bedel, CFP, is Director of Strategy and Finance and heads Generation NeXt services for Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit the Bedel Financial website at bedelfinancial.com or email Evan.

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