One of the most controversial aspects of the new tax law is the limitation on the deduction for state and local taxes. The limit was set at $10,000, and as a result, many affluent taxpayers will find themselves able to deduct a good deal less than they actually pay in state and local taxes.

tax-law

As the tax law was slowly moving towards passage, states began exploring ways they might restore at least some of this deduction for their citizens. Georgia was no exception, and the state already had a few programs on the books that fit the bill. The programs in question had been established to fund scholarships to private schools and to support rural hospitals that were in danger of closing.

Prior to the enactment of the new tax law, the programs offered some tax benefit to some taxpayers, but the limitation on state and local tax deduction combined with some legislative changes to the programs made them much more attractive. Here is how the programs work:

  • The Georgia legislature sets an annual limit on the amount of contributions that can be made to the programs. The cap is necessary, as any contributions taxpayers make to the programs is money that will not be paid in state income tax. Given this revenue loss, legislatures must budget for the programs by setting a limit on total contributions that will be accepted. Taxpayers, in turn, have to apply for the program and if the application is received after the annual limit of credits has been issued, the application will be denied.
  • The contribution amount is treated as a state tax credit, which means that 100% of the contributed amount is available to reduce your state income tax. Since the taxpayer is using the contribution to offset the amount owed in state tax, the amount that can be claimed as a state tax deduction on the Federal return is reduced. However, bear in mind that the new tax law limits your state and local tax deduction to $10,000, so a reduction in state tax may have no impact as we’ll see below.
  • The amount directed towards one of these programs can also be claimed as a charitable contribution on your Federal tax return. Thus, for a couple in the 32% tax bracket, a $10,000 donation will reduce Federal taxes by $3,200 (although the net savings is a bit less since the amount claimed as a deduction under these programs must be added back to taxable income on the Georgia income tax return.)
  • Prior to the limit on the limitation on the State and local tax deduction, in many instances, contributing to these programs simply meant a taxpayer was trading one deduction for another. A $10,000 contribution would increase the charitable deduction, but it would also decrease the deduction for state tax paid by $10,000. However, for taxpayers whose total state and local tax bill is well more than $10,000, participating in these programs can increase your charitable deduction while not reducing the amount you deduct for state and local taxes since the latter is now limited to $10,000.

As an example of how these programs work, let’s take a look at the situation for Georgia taxpayers Jamie and Sue. Their total state tax is $18,000, and property tax is $14,000, and they are in the 32% Federal tax bracket. The combined $32,000 for state income tax plus property tax is well above the $10,000 amount they can deduct for Federal tax, so even if they decreased their state tax via a $10,000 contribution to one of the programs described above, their $10,000 federal deduction would not change. In addition to this deduction, they would also have a charitable deduction of $10,000, which would decrease their Federal tax by $3,200.

More information about the Georgia GOAL program funding scholarships is here, and information on the Georgia HEART program funding rural hospitals is here. If you’re interested in either program, talk with your tax advisor about how participation might impact your liability under the new tax law.