As 2021 draws to a close, many taxpayers are engaging in year-end giving to help their communities during the holiday season. Louisiana has created a unique opportunity by which taxpayers can receive a nonrefundable Louisiana income tax credit through its Tuition Donation Credit Program (TDCP). The TDCP works by allowing donations to entities known as School Tuition Organizations to qualify for a nonrefundable state income tax credit.
A School Tuition Organization (STO) is an entity that is exempt from taxation pursuant to IRC 501(c)(3). Specifically, these organizations use donated funds to award scholarships, allowing students to attend a qualified nonpublic school of their parents’ or guardians’ choice. Importantly, an STO cannot limit the scholarships it provides to a single school. STOs also have certain administrative requirements. For example, no less than 95% of monetary donations shall be used to provide scholarships to students. Thus, STOs provide a meaningful way to enhance educational access in a taxpayer’s community while also generating tax benefits that may help lessen federal and state tax burdens.
For state tax purposes, any taxpayer who is required to file a Louisiana income tax return will receive a 95% nonrefundable income tax credit for a donation to an STO. Importantly, this credit can be used in addition to any federal credit or deduction earned for the same donation. While the IRS has issued guidance that generally disallows a charitable deduction for any amounts for which a state tax credit is received, taxpayers can deduct amounts received as a state tax credit as a state and local tax payment, subject to any federal limitations on deduction of state and local tax liabilities. Thus, a taxpayer may be able to generate both a federal and state benefit for this donation. In order to claim the credit at the state level, however, the taxpayer must add back any amounts deducted in computing their federal adjusted gross income for donation to the STO on the Louisiana return.
As described above, STOs are a powerful tool that can be leveraged to expand educational access in your local community--and the state of Louisiana as a whole--while also generating a meaningful tax benefit. For more questions on STOs and their requirements, contact your P&N tax advisor.