Fall is a great time to be proactive about your tax strategy. The year will be over before you know it, and you don’t want to miss a meaningful opportunity to lower your taxes.
You may already know about some common deductions and strategies like charitable giving and tax loss harvesting. But if you’re an Arizona resident, you have an additional tool available to you in the form of tax credits that reduce the tax you owe. These credits essentially allow you to redirect some of your state income tax liability toward a specific cause so that you can directly benefit children and families in your community. It’s a unique opportunity to decide how some of your tax dollars get spent, and it’s a financial planning tool every Arizona taxpayer should be familiar with.
How Does the Arizona Tax Credit Work?
The state of Arizona offers dollar-for-dollar nonrefundable individual income tax credits for cash donations made to certain charitable causes. In other words, you can make a cash donation to a qualifying organization and those dollars will directly decrease what you owe on your tax bill.
There are four potential credits you can utilize:
- Qualifying Charitable Organizations (QCOs): Local organizations that provide for the basic needs of low-income children, individuals, and families, as well as individuals with disabilities. Married couples filing jointly can claim up to $800. Individuals and couples filing separately can claim up to $400.
- Qualifying Foster Care Organizations (QFCOs): Organizations that provide services, clothing, and shelter to the children in the Arizona foster care system. Married couples filing jointly can claim up to $1,000. Individuals and couples filing separately can claim up to $500.
- Private School Tuition Organizations: Donations to organizations that provide scholarships to students enrolled in Arizona private schools. The scholarship recipient cannot be a dependent of the taxpayer. Married couples filing jointly can claim up to $2,483. Individuals and couples filing separately can claim up to $1,243.
- Public Schools: Contributing toward qualifying activities and programs at Arizona public and charter schools. Qualifying programs include extracurricular activities and standardized testing fees. Fees paid for your own child can qualify for this credit. Married couples filing jointly can claim up to $400. Individuals and couples filing separately can claim up to $200.
A full list of qualifying organizations and eligible school programs can be found on the AZ Dept. of Revenue website.
You can claim all four of these credits in a single tax year, allowing you to potentially reduce your tax liability by over $4,000. Note, however, that these credits are not refundable, meaning they will not be added to your tax refund if your donations exceed your annual tax liability.
As a simple example, if you owe $5,000 in state income tax, you can donate $4,000 to qualifying organizations and pay only $1,000 in taxes. If you owe $3,000 in tax and donate $4,000 to qualifying charities, the credits will cover your tax bill, but you would not receive the difference in a refund check. However, credits can be carried over into the next tax year for up to five years.
Of course, these are just examples and do not constitute financial advice. You’ll want to speak to your financial advisor or tax professional regarding the impact and appropriateness of utilizing these tax credits.
How is the Tax Credit Different from a Tax Deduction?
Although tax credits and deductions can both reduce your tax liability, they function in different ways. To claim most deductions, you must itemize your return. The deduction works by reducing your overall taxable income. Therefore, the amount of savings you’ll receive on your tax bill is dependent on your income tax rate.
The Arizona tax credit is subtracted from what you owe in tax, regardless of your income. You also do not need to itemize to take advantage of it. This means that everyone, regardless of income, is eligible to receive these credits. However, bear in mind that you cannot claim a deduction for these donations if you’re also receiving a tax credit for them. You’ll want to consult with your tax professional about the best strategy for your specific financial situation.
A Chance to Practice Generosity and Good Stewardship
Arizona’s tax credit program provides you with a unique ability to direct some of your tax dollars toward causes that you believe in, and the benefits stretch beyond financial strategy. Generosity fulfills many human needs, from the emotional to the spiritual. It feels good to give. There is a true joy and fulfillment that we experience from acts of generosity. It strengthens our compassion and helps us to make a difference in our communities.
In this way, charitable giving is its own reward. The tax benefits are merely an added incentive and a way to fold money management techniques into the generosity you might already be practicing.
If you’re ready to give, you can make a donation online. Charitable contributions can be made any time before April 15th. Be sure to speak with your financial advisor or tax professional about how to claim these credits on your taxes, and any other questions you might have about tax liability, charitable giving, and other financial strategies as they apply toward your specific financial goals and situation.