Redirecting State Income Tax Payments Puts Your Tax Dollars to Work… Where You Want Them

Charity workers collecting donations.If you support an eligible Arizona charity or school, taking advantage of state tax credits is an attractive way to lessen your pain as a taxpayer and help a worthy cause – at no net cost to you.

Before we discuss the various credits and whom they benefit, let’s be clear about the distinction between an income tax “deduction” and a “credit.” Here’s the difference in a nutshell:

A tax deduction reduces your taxable income. The resulting tax savings is a fraction of the deduction, and the savings depends on your income tax bracket. If, for example, your income tax rate is 28%, a $100 deduction saves you about $28 in taxes.

In contrast, a tax credit lowers your tax bill, dollar for dollar. A $100 tax credit in most cases reduces your tax bill by $100. (Note: In general, a contribution that qualifies for a state tax credit cannot also be included in your state income tax deductions nor can it be deducted on the federal return for the year the contribution is made.)

While the use of tax credits doesn’t lower your overall cash outlay, it does give you some control over where your cash goes and how it is used. In Arizona, credits that individual taxpayers can claim include the Private School Tuition Tax Credits, the Public School Tax Credit, the Qualifying Charitable Organization Tax Credit, Foster Care Organization Tax Credit, and the Arizona Military Family Relief Fund.

Public School Tax Credit

Form 322

A credit for contributions of up to $400 for a “married couple filing jointly” and $200 for all other filers is available for payment of fees to an Arizona public school or charter school for support of extracurricular activities or character education programs. Examples of these activities include field trips, sporting activities, and fine arts. The fee can be paid for the benefit of your child’s participation in a particular activity. Fees must be for the exact amount of the activity, and the activity must have a monetary charge in order to participate. Fees can also be paid to a central fund at the school to fund extracurricular activities for all students. In all cases the checks should be made out to the individual school. For 2020, this donation can be made as late as April 15, 2021 and still be claimed on your 2020 Arizona tax return.

Qualifying Charitable Organization (formerly working poor) Tax Credit

Form 321

A credit of up to $800 for “married couples filing jointly” and up to $400 for all other filers is available for cash contributions to a qualifying charitable organization (QCO). This includes those groups that provide services to the chronically ill or disabled children.

See a current list of qualifying charities. The donation deadline is April 15, 2021 to be claimed on your 2020 Arizona tax return.

Contributions to umbrella organizations (such as Mesa United Way and Valley of the Sun United Way) must be specifically designated for the credits.

Foster Care Organization Tax Credit

Form 352

A credit of up to $1,000 for “married couples filing jointly” and up to $500 for all other filers is available for cash contributions to a qualifying foster care organization.

See a current list of qualifying foster care organizations. The donation deadline is April 15, 2021 to be claimed on your 2020 Arizona tax return.

Contributions to umbrella organizations (such as Mesa United Way and Valley of the Sun United Way) must be specifically designated for the QCO and/or FCO credits.

Private School Tuition Tax Credits

Private School Tuition Organizations – Form 323

The 2020 tax credit for contributions to a School Tuition Organization is $1,186 for “married couples filing jointly” and $593 for all other taxpayers. The credit is available for a contribution that provides scholarships or grants to qualified elementary and high schools. Your contribution cannot be designated for the direct benefit of your dependent, but can be made to benefit a relative if they are not your dependent. Before making your contribution, make sure that the organization meets the rules set out by the Arizona Department of Revenue to qualify as a School Tuition Organization (see a list of STOs at the Department of Revenue website). For 2020, this donation can be made as late as April 15, 2021 (or the date on which you file your Arizona income tax return, whichever comes first) and still be claimed on the 2020 state tax return.

Certified School Tuition Organizations

Form 348

Related to the Private School Tuition Organizations credit, the Certified School Tuition Organization tax credit allows donors to receive credit for a contribution over and above the original tax credit. With the additional tax credit, the total donation to School Tuition Organizations can be as much as $2,365 for “married couples filing jointly” and $1,183 for all other taxpayers for 2020. The Arizona taxpayer must first donate the maximum original private School Tuition Organization Tax Credit ($1,186 for “married couples filing jointly” and $593 all other taxpayers) in order to donate an additional amount for the Certified School Tuition Organization tax credit. The maximum additional credit amount that may be taken for tax year 2020 is $1,179 for “married couples filing jointly” and $590 for all other taxpayers. As with the previously discussed credit, this donation can be made as late as April 15, 2021 (or the date on which you file your Arizona income tax return, whichever comes first) for the 2020 tax year.

Arizona Military Family Relief Fund

Form 340

A credit for contributions of up to $400 for “married couples filing jointly” and $200 for all other taxpayers is available for contributions to the Military Family Relief Fund. The Arizona Military Family Relief Fund provides financial assistance for active-duty service members, post 9/11 veterans and their families. Financial assistance is made available to assist with unforeseen financial hardships including those caused by service-connected disabilities. The credit is limited to the first $1,000,000 received. Keep your acknowledgment letter as support.

Contact Us

If you have questions about any of these credits and how to maximize your tax benefit, contact your Schmidt Westergard & Company tax professional at 480-834-6030.