STO Donations Offer Workaround to Tax Deduction Limitations
One of the main changes to come from the Tax Cuts and Jobs Act was a limitation on the amount you can deduct in state income and property taxes on your federal return – $10,000 to be exact. But there’s a workaround available in Louisiana to increase your itemized deductions: making charitable contributions to qualified State Tuition Organizations (STOs).
Act 377 of the 2017 Regular Session of the Louisiana Legislature amended the provisions regarding donations made to a school tuition organization (STO), which provides scholarships to qualified students to attend qualified schools. An STO is a 501(c)(3) nonprofit required by law to spend 95 percent of every donation on scholarships for low-income students in grades K-12.
Taxpayers previously received a rebate for donating to STOs, but they now earn a credit as of January 1, 2018, which is available to corporate and individual taxpayers who are required to file a Louisiana tax return and who donate to a qualified STO. Since an STO is a 501(c)(3), donors should receive a federal charitable contribution deduction for the full amount contributed to the STO, subject to the current limitations on charitable contributions and itemized deductions. However, the IRS will be providing further guidance on this in the near future.
There is no limit to how much individuals can donate to an STO, and the credit will be earned in the year in which the donation was made. While the credit is nonrefundable, any credit that is unused in any year can be carried forward for three years.
The credit will not be limited to 72 percent as with many other Louisiana credits. The amount of the credit is the actual amount of the taxpayer’s donation that is used by the STO to fund qualified scholarships (excluding administrative costs).
In regard to adding back to Louisiana taxable income for the charitable deduction taken on the federal tax return, the 2018 tax return and instructions will account for adding back to prevent a double benefit.
There currently are two Louisiana organizations that accept the application and administer the program: ACE Scholarships Louisiana and Arete Scholars Louisiana.
We will continue to share information regarding changes, clarifications and new guidance as it becomes available. In the meantime, please contact your Ericksen Krentel tax professional or email us if you have any questions or concerns.
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