How would you like to give $10,000 to your favorite school to fund a financial aid scholarship, while spending as little as $2,000 of your own money? This may sound too good to be true, but thanks to Indiana’s School Scholarship Tax Credit program, it’s possible. And it’s making some Indiana students’ dreams of a private education a reality!
SGOs and Indiana’s Tax Credits
Indiana’s tax credit is available to individuals or corporations that donate to a scholarship-granting organization (SGO) approved by the Indiana Department of Education (DOE) and administered through the Indiana Department of Revenue (DOR). 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
You may have heard that recent IRS tax law changes have reduced the charitable tax deductibility for Scholarship-Granting Organization (SGO) donors. Here’s the change: Instead of 100% of your contribution to the SGO being deductible on your federal tax return, the deductible amount must be reduced by the state tax credit that you are receiving. However, don’t let that stop you from donating. Some great triple tax benefits still remain!
Under the current rule, you receive a 50 percent Indiana state income tax credit and a charitable tax deduction for the contribution amount, minus the state credit, on your federal tax return. But let’s take it one step further. Through the SGO program, you are allowed to gift appreciated stock, which creates a triple-treat tax savings strategy.
For example, let’s assume Ted gifted $10,000 of appreciated stock with a cost basis of $5,000. Here’s how it works:
- $5,000 Indiana income tax credit
- 50% of $10,000 = $5,000
- $1,190 in long-term capital gains savings from stock gift
- $5,000 of unrealized gains x .23.8% (includes Net Investment Income Tax) = $1,190
- $1,850 of federal tax savings, assuming Ted is in the highest tax bracket of 37 percent
- $5,000 ($10,000 reduced by $5,000 state credit) x 0.37% = $1,850
- $8,040 Total maximum savings = $8,040
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 $1,960. Thank you, Indiana Department of Education!
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 $15 million in total tax credits, with benefits available on a first-come-first-served basis. The state’s fiscal year runs from July 1, 2019, through June 30, 2020. To find a list of eligible institutions, gifting instructions, and more information about the program, please visit www.in.gov/dor/4305.htm.
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 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 their website or email Evan.