Why Your Holiday List Should Include This Tax Strategy

Why Your Holiday List Should Include This Tax Strategy

by on Nov. 8, 2017

 
 

It’s that time of year again. No, not pre-Black Friday shopping lists, Thanksgiving meal to-dos, Christmas decorations in Wal-Mart, or college football season (ok…maybe college football season). It’s annual last-minute income tax planning time. If you are like most Americans, you despise paying taxes and loathe even more the thought of filing your own tax return or compiling the laundry list of items needed to deliver to your CPA or tax preparer. Because of this aversion to tax-related topics, you may be inclined to delay thinking about income taxes until April. However, if that is your mindset, you could be making a grave (and costly) mistake.

Most effective tax planning is done before year-end. In large part, this is because a tax return is backward-looking. In other words, when you file your tax return in 2018, you are reporting on income and expenses that occurred mostly in 2017. After completing a preliminary draft of your tax return in early 2018, if you discover that your 2017 tax bill is much higher than anticipated, then there is often very little that can be done to reduce your tax liability (save an IRA contribution, maybe).

As a result of this backward-looking tax system, we help and encourage our clients to consider ways to reduce their tax liability in a more proactive manner. This is especially important for high-income taxpayers who are subject to income tax brackets of 28%, 33%, 35%, and 39.6%. For these taxpayers, there may be additional “surtaxes” that can apply to their income including the Alternative Minimum Tax, the Additional Medicare Tax, and the Net Investment Income Tax.

Let’s focus on one of these surtaxes: the Alternative Minimum Tax (or AMT, for short). AMT is probably one of, if not the most despised parts of the U.S. income tax code. In addition, it’s one of the most confusing and misunderstood surtaxes. Each year, roughly 4 million taxpayers are subject to AMT. For those taxpayers, one common question persists, “What can I do to avoid AMT?”

If you are asking this question (and are a resident of South Carolina), you may be excited to read that there’s an answer to your question. Our “AMT” clients have likely heard us, or their tax preparer, mention this in previous years. It’s called the Exceptional SC Scholarship Fund and it can be the Alternative Minimum Tax’s kryptonite. 

The Exceptional SC Scholarship Fund is a program “made up of tax-deductible donations that serve as scholarships for the private school tuition of exceptional needs students in South Carolina.” (You can read more about the program here). So, how does this program benefit you?  An individual or corporation who pays taxes in South Carolina and contributes to this fund could receive a dollar-for-dollar tax credit to offset up to 60% of their South Carolina state tax liability. In addition to receiving a South Carolina tax credit, you are allowed to deduct the same amount as a charitable donation on your Federal income tax return (as an itemized deduction). How’s that for creative tax planning!!

For those of you who are subject to AMT, contributing to this program will most likely reduce your tax bill. That’s because state income tax payments are disallowed for AMT purposes, but charitable donations are allowed. So, by making a contribution to the Exceptional SC Scholarship Fund, you would reduce your state income tax payments and increase your charitable donation.  The result—a lower AMT bill!

For those not subject to the Alternative Minimum Tax, the program still provides you with an opportunity to make a positive contribution to children with exceptional needs while enjoying a state tax benefit.

If this program sounds appealing to you, consider contacting your CPA or tax preparer sooner rather than later. This year’s threshold is $11,000,000, and the program operates on a first-come, first-served basis. As of November 8, 2017, there was approximately $4,794,340 of tax credits left, so act fast because this tax-saving strategy may be gone faster than you can say “Go Dawgs!!” (It is college football season, after all!) Even if we disagree on college football teams, hopefully we can all agree that the Exceptional SC Scholarship Fund provides one way to avoid AMT, which can be a winning combination.

 

Disclaimer:  The above-mentioned information is generic in nature and is intended for informational purposes only.  It assumes current income tax laws remain in effect and does not consider any of the possible tax reforms.  Please consult with your tax preparer to determine if you should consider making a contribution to the Exceptional SC Scholarship Fund. 

Why Your Holiday List Should Include This Tax Strategy

by on Nov. 8, 2017

 
 

It’s that time of year again. No, not pre-Black Friday shopping lists, Thanksgiving meal to-dos, Christmas decorations in Wal-Mart, or college football season (ok…maybe college football season). It’s annual last-minute income tax planning time. If you are like most Americans, you despise paying taxes and loathe even more the thought of filing your own tax return or compiling the laundry list of items needed to deliver to your CPA or tax preparer. Because of this aversion to tax-related topics, you may be inclined to delay thinking about income taxes until April. However, if that is your mindset, you could be making a grave (and costly) mistake.

Most effective tax planning is done before year-end. In large part, this is because a tax return is backward-looking. In other words, when you file your tax return in 2018, you are reporting on income and expenses that occurred mostly in 2017. After completing a preliminary draft of your tax return in early 2018, if you discover that your 2017 tax bill is much higher than anticipated, then there is often very little that can be done to reduce your tax liability (save an IRA contribution, maybe).

As a result of this backward-looking tax system, we help and encourage our clients to consider ways to reduce their tax liability in a more proactive manner. This is especially important for high-income taxpayers who are subject to income tax brackets of 28%, 33%, 35%, and 39.6%. For these taxpayers, there may be additional “surtaxes” that can apply to their income including the Alternative Minimum Tax, the Additional Medicare Tax, and the Net Investment Income Tax.

Let’s focus on one of these surtaxes: the Alternative Minimum Tax (or AMT, for short). AMT is probably one of, if not the most despised parts of the U.S. income tax code. In addition, it’s one of the most confusing and misunderstood surtaxes. Each year, roughly 4 million taxpayers are subject to AMT. For those taxpayers, one common question persists, “What can I do to avoid AMT?”

If you are asking this question (and are a resident of South Carolina), you may be excited to read that there’s an answer to your question. Our “AMT” clients have likely heard us, or their tax preparer, mention this in previous years. It’s called the Exceptional SC Scholarship Fund and it can be the Alternative Minimum Tax’s kryptonite. 

The Exceptional SC Scholarship Fund is a program “made up of tax-deductible donations that serve as scholarships for the private school tuition of exceptional needs students in South Carolina.” (You can read more about the program here). So, how does this program benefit you?  An individual or corporation who pays taxes in South Carolina and contributes to this fund could receive a dollar-for-dollar tax credit to offset up to 60% of their South Carolina state tax liability. In addition to receiving a South Carolina tax credit, you are allowed to deduct the same amount as a charitable donation on your Federal income tax return (as an itemized deduction). How’s that for creative tax planning!!

For those of you who are subject to AMT, contributing to this program will most likely reduce your tax bill. That’s because state income tax payments are disallowed for AMT purposes, but charitable donations are allowed. So, by making a contribution to the Exceptional SC Scholarship Fund, you would reduce your state income tax payments and increase your charitable donation.  The result—a lower AMT bill!

For those not subject to the Alternative Minimum Tax, the program still provides you with an opportunity to make a positive contribution to children with exceptional needs while enjoying a state tax benefit.

If this program sounds appealing to you, consider contacting your CPA or tax preparer sooner rather than later. This year’s threshold is $11,000,000, and the program operates on a first-come, first-served basis. As of November 8, 2017, there was approximately $4,794,340 of tax credits left, so act fast because this tax-saving strategy may be gone faster than you can say “Go Dawgs!!” (It is college football season, after all!) Even if we disagree on college football teams, hopefully we can all agree that the Exceptional SC Scholarship Fund provides one way to avoid AMT, which can be a winning combination.

 

Disclaimer:  The above-mentioned information is generic in nature and is intended for informational purposes only.  It assumes current income tax laws remain in effect and does not consider any of the possible tax reforms.  Please consult with your tax preparer to determine if you should consider making a contribution to the Exceptional SC Scholarship Fund. 


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