State and local tax alert: Illinois to invest in Kids Scholarship Tax Credit Program

In 2018, Illinois is launching a new tax credit program that provides scholarships to private school students. On August 31, Gov. Bruce Rauner, signed a comprehensive education funding bill into law and enacted the Invest In Kids Scholarship Tax Credit Program benefiting private school students. Starting on Jan. 2, 2018, and continuing for the next five years, corporations and individuals can donate to Scholarship Granting Organizations (“SGO”) and receive a 75 percent credit (up to $1,000,000) on their state income tax return. These organizations, will in turn, be able to use the money to grant scholarships and offer access to private education to low-income and working-class students.

In order to claim the credit, which is detailed below, a taxpayer must forgo the federal itemized deduction for the donation. However, with federal tax reform starting in 2018, the standard deductions are increasing; combined with the state tax deduction limitations, fewer households will receive any federal tax benefit from their charitable contributions. This new tax credit program will not only allow a taxpayer to receive state income tax benefits, but may provide more favorable overall tax savings.

How it works

Individual, trust, and corporate donors are all eligible to contribute to an SGO. Individual donors have the flexibility to be able to direct their contribution to a particular subset of schools or a particular school but may not direct to a particular subset of students or a particular student. Corporations and trusts do not have the same level of flexibility. Their contribution will go into a general fund and be awarded in a manner that is geographically proportionate to enrollment in recognized nonpublic schools in Illinois.

Example #1 – Federal vs. state benefit (Taxpayer itemizes federal deductions)

Mr. & Mrs. Smith (filing Married Filing Jointly) are taxpayers in the 37 percent Federal tax bracket (highest 2018 rate) and make a $10,000 cash gift to a public charity (assuming the taxpayer is over the standard deduction amount).

• Federal: $10,000 value of gift X .37 tax rate = $3,700 maximum federal tax savings (no state impact)

If Mr. & Mrs. Smith instead contribute the same $10,000 to an SGO, if they forgo the federal itemized deduction and instead claim the Illinois credit, their total tax savings will be greater:

• State: $10,000 value of gift X .75 value of state credit = $7,500 state tax savings (no federal deduction)
• Total: $3,800 net additional tax savings

Example #2 – Federal vs. state benefit (Taxpayer uses standard deduction)

Mr. & Mrs. Smith (filing Married Filing Jointly) are taxpayers in the 37 percent Federal tax bracket (highest 2018 rate) and make a $10,000 cash gift to a public charity. However, the taxpayers only other itemized deduction for the year is $10,000 of real estate taxes (new limit starting in 2018). Combined with the $10,000 cash gift, the Smith’s total eligible itemized deductions will be $20,000. The Smith’s will elect to use the more beneficial and simplified standard deduction of $24,000 in 2018 ($12,000 for Single).

• Federal: $0 federal tax savings (no state impact)

If Mr. & Mrs. Smith instead contribute the same $10,000 to an SGO, they will still not be able to deduct on their federal return but their total tax savings are greater:

• State: $10,000 value of gift X .75 value of state credit = $7,500 state tax savings (no federal deduction)
• Total: $7,500 net additional tax savings

How to secure the credit

Donors should register with the Illinois Department of Revenue. The application process requires a free online My Tax Illinois account. In order to complete the registration process, new applicants will receive security authorization via mail. Once registered, donors will be able to reserve tax credits on the Illinois Department of Revenue website. The entire amount reserved and awarded must be donated to an SGO or will forfeit ANY benefit. If the taxpayer is unable to utilize all of the credit on their tax return, the unused amount will carry forward to the next year.

They will then have 60 days from the date on the authorization to contribute to the SGO of their choice. After the donation is made, they will receive a Certificate of Receipt from the SGO, indicating that a donation was made. The SGO will subsequently notify the Department of Revenue that the donation was made.

The Illinois Department of Revenue has created a website dedicated to the new program. The website provides a list of SGOs as well as regions that will receive priority during the first three months of student applications, from January 1 to April 1. Individual taxpayers can select the program to which they want to contribute.

Program limitations

• A taxpayer’s credit cannot exceed $1,000,000.
• A taxpayer cannot take a credit if the taxpayer claims a federal income tax deduction for the contribution.
• A taxpayer must apply to the Department of Revenue for a contribution authorization certificate prior to contributing and has 60 days from the date on the authorization to contribute.
• Illinois cannot issue more than $75 million of total credits during any calendar year.
• Credits are awarded in a manner that is geographically proportionate to enrollment in recognized nonpublic schools in Illinois.

If you have any questions about the Illinois Invest In Kids Scholarship Tax Credit Program, eligibility and qualification requirements, the registration or application process, any of its reporting requirements, or how it can benefit you, please contact your tax advisor.