New CA Tax Credit for Certain College Donations

Governor Brown signed a new bill into law on September 16, 2014 that authorizes a College Access Tax Credit for approved contributions to the College Access Tax Fund (“the Fund”) in 2014 through 2016.  Donations to the Fund will help fund the Cal Grant program.

Taxpayers must complete an application if they would like to make a donation.  The California Educational Facilities Authority will approve up to $500 million per year on a first come first serve basis per year.  Any unused amount from a previous year can be added to future year’s limit.  If approved, the taxpayer must make the donation within 20 days and will be eligible to take a 60% tax credit, in lieu of a deduction on their CA tax return.  A deduction may still be taken on taxpayers’ Federal tax return.  Any unused credit by the taxpayer will carryover for 6 years.

Not all of the money will go to the school however.  Only 40% will go to the colleges and the balance will reimburse the state for lost tax revenue.  The credit percentage drops to 55% in 2015 and 50% in 2016.

A taxpayer in the maximum tax brackets for Federal and California could realize a tax benefit of 75.8% if they are not in AMT.  For example a $10,000 donation would result in a $6,000 tax credit for CA and a $3,960 tax deduction on their Federal tax return (but they would lose the benefit of the $6,000 state tax deduction or $2,376).  Therefore the total benefit is $7,584.  If the taxpayer is in AMT, the Federal benefit would be $2,800 with the $6,000 state credit.  Total benefit is therefore $8,800 or 88% since state taxes are not allowed as a deduction if the taxpayer is in AMT.

If you have any questions about year-end planning, please contact our office.