Illinois taxpayers, both individual and corporate donors, can claim credits on their Illinois income taxes for donations made to organizations that provide scholarships for students (grades K-12) from low- and middle-income families to attend private schools. The program is designed to improve families' access to educational options, and the associated 75% tax credit could be a significant financial benefit for donors.
Here is an overview of what you need to know about the new scholarship program and tax credit:
How does Illinois's tax credit scholarship program work?
Illinois's Invest in Kids Scholarship Tax Credit Program, which is scheduled to be repealed after five years, was created as part of an education funding reform bill that Gov. Bruce Rauner signed into law in August 2017. Beginning in January 2018, Illinois residents can make donations to registered scholarship granting organizations (SGOs), which then will distribute the scholarships to qualifying students and families according to eligibility guidelines set by the law. The scholarships will cover up to 100% of tuition at private schools in Illinois, including religious and nonreligious schools. The amount of a scholarship generally is capped at the average cost to educate a student in Illinois, which is about $13,000, and students with unique learning needs can receive additional amounts.
Individuals may direct their donations to be used at a specific school or subset of schools, but corporations may not make such directions. Neither individuals nor corporations can direct their donations to a specific student. To be eligible to receive a scholarship, students must come from households with income of less than 300% of the federal poverty level.
There are 17 other states besides Illinois that have tax credit scholarship programs, according to EdChoice, a nonpartisan, not-for-profit organization focused on improving educational choice. Watch EdChoice's video on how tax credit scholarships work.
What are the tax benefits for donors?
Donors receive a credit against their Illinois state income tax equal to 75% of the amount of the donation. For example, if a donor contributes $10,000, the credit would reduce the amount of Illinois state income tax owed by $7,500. The credit per donor is capped at $1 million year, which equates to a donation of about $1.33 million. The credit is nonrefundable, but any unused amounts in a given year can carry forward up to five years.
It is important to note that donors may not claim the credit for any contribution for which a federal income tax deduction was also claimed. That is to say, taxpayers cannot receive both the Illinois state tax credit and a federal tax deduction for the same contribution. In many cases, claiming the Illinois tax credit will result in larger tax savings. For example, if an individual taxpayer in the highest marginal income tax bracket (39.6%) makes a $10,000 contribution and claims the federal deduction, it would result in tax savings of $3,960. But if the taxpayer instead claims the Illinois credit, it would result in tax savings of $7,500, assuming the taxpayer owes state income tax of at least that amount.
The above example is a just a high-level illustration, and the actual amount of the tax savings will depend on the particulars of the donor's tax situation. Another factor that would affect the net amount of the tax savings is whether the federal deduction for state and local taxes ends up being eliminated as part of the federal tax reform bill that is working its way through Congress. Regardless, it is important to consult your tax advisor to determine the implications in your specific situation.
What is the process for making a deduction and claiming the credit?
There are three primary steps for claiming the tax credit:
- Create an online account with the Illinois Department of Revenue: If you do not already have an account with the Illinois Department of Revenue's online portal, mytax.illinois.gov, you will need to create one to reserve a tax credit. Creating an account and registering with mytax.illinois.gov will take at least five business days.
- Reserve a credit: Beginning at midnight on January 2, 2018, donors can reserve a tax credit by logging into their online account at mytax.illinois.gov. The credits will be awarded on a first-come, first-served basis until the state's total annual allotment of $75 million in credits has been reserved for the year.
- Make a donation: Once donors have reserved a credit, they have 60 days to make their contribution to an SGO. Securities, as well as cash, can be used to fund the donation. Then, when donors file their taxes for that year, they can apply the credit against their Illinois income taxes.
In some of the other states that have tax credit scholarship programs, the full allotment of available credits has been claimed within hours. Given the potential high demand for these tax credits in Illinois, it is recommended that taxpayers who are interested in making a donation begin the process of creating an online account with the Illinois Department of Revenue as soon as possible so they are able to reserve a tax credit as soon as the site opens on January 2 at 8:00 a.m.
Where can potential donors learn more?
To learn more about Illinois's Invest in Kids Scholarship Tax Credit Program, visit the Illinois Department of Revenue. The site includes additional information about how to apply for a credit as well as a list of approved SGOs.
For more detailed instructions for creating an online account with the Illinois Department of Revenue, reserving a credit, and making a donation, see the online guide created by Empower Illinois.
William Blair does not provide accounting, legal or tax advice. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax or investment advice, or as a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor's objectives, guidelines, and restrictions.