College Access Tax Credit

July 20th, 2016 Posted by Tax Planning No Comment yet

Most likely if you are donating your money to a charitable cause, you are doing so for reasons other than the tax benefits (although the tax benefits are likely a welcome bonus).  However, California is offering tax savings through the College Access Tax Credit that may be reason enough to contribute.

California’s goal in offering this tax credit is to bolster the Cal Grants program, which benefits to low-income college students.

Tax CreditThis tax credit is available to individuals and business entities that file tax returns in California.  To qualify, a taxpayer must apply for a credit allocation reservation. This is a fairly simply process of providing identifying information and the amount that you wish to contribute.  California will then send the taxpayer approval along with instructions on how to send the contribution.  The taxpayer must be prepared to make the contribution within 20 days of the date of the Notice of Allocation Reservation (the approval form).

This tax credit is worth 50% of the contributed amount for tax years 2016 and 2017 (the year in which this credit is due to expire).  However, if you make the contribution through an S-corporation (which I strongly recommend), the S-corporation is also entitled to a tax credit equal to 16.67 percent of your contribution.

In addition to the California tax savings, the contribution is deductible on your federal income tax return as a charitable contribution.  This means that, if you take itemized deductions, you will have federal tax savings as well.  However, the amount of your federal benefits depends upon your marginal tax rate.

Lets look at an example:

Richard, a California taxpayer, is the 100% shareholder of an S-corporation.  The S-corporation makes a $10,000 contribution to the College Access Tax Credit Fund.  As a result, the S-corporation is entitled to a tax credit of $1,667.  The corporation’s shareholder (Richard) is entitled to California tax credit of $5,000 and a $10,000 federal charitable contribution deduction. If Richard is in the top federal tax bracket (39.6%), his charitable deduction would be worth $3,960 to him.  All together, Richard and his S-corporation saved $10,627 by making a $10,000 contribution (a net gain of $627).


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