Make Your Tax Dollars Work for You - Take the Credit!

It’s tax time again, and every day I hope my W-2 will come in the mail. I am anxious to see how much my husband and I owe the state of Arizona, especially since we didn’t pay any state taxes in 2009. Rather than having state taxes deducted from our paychecks, we decided to give that money to the elementary school run by our church. That’s right – we donated our tax dollars to a school! The money we donated will be used to provide tuition assistance to students in need. We love the school and believe in the work that it does, which is more than we can say about many of the government programs run by the state.

We were able to do this through something called the CTODP - Catholic Tuition Organization of the Diocese of Phoenix. Arizona allows residents to donate up to $500 ($1,000 for married couples filing jointly) to a Catholic school of their choice and get a tax credit. The first time we heard about the CTODP it was late in the year, so we didn’t participate because we had already been paying state taxes all year and couldn't shell out more money. The next year, however, we changed our withholdings so that no state taxes were withheld, and the extra money in our paychecks we donated at the end of the year. We know we might owe Arizona some money if our tax liability is more than the $1,000 we donated, but we are prepared for this. And even though we might still owe a little, we were able to help kids who wouldn’t otherwise be able to attend a great private school, rather than funding the state government. Now that’s using my tax dollars the way I want to!

Until hearing of the CTODP, I didn’t know what a tax credit was; I was only familiar with deductions, and I never contributed enough to itemize at the federal level. However, I have learned that there is a significant difference. Tax credits are much more beneficial to taxpayers than deductions. It works like this:

Deductions reduce the amount of income on which you pay taxes. If you make $60,000 and deduct $1,000 for a charitable donation, you will then be taxed on an income of $59,000. Though helpful, this won't make a huge dent. A credit, however, is applied after your taxable income is calculated, and reduces the amount of taxes you actually owe. So if you make $60,000 and owe the state $600 in taxes, and you have donated $500 to a qualified charity, you will then owe the state only $100. You’re shelling out the same amount of money, but you’re getting to choose where it goes, and you’re paying that much less in taxes. (Credits like this currently seem to only be available at the state and local levels, and not at the federal level. Charitable contributions can be deducted at the federal level, though to do this, taxpayers need to itemize deductions greater than the standard deduction determined by the IRS.)

Arizona also offers the Charitable Tax Credit, sometimes referred to as the Working Poor Tax Credit, where you can donate to many different charities and get a dollar for dollar state tax credit - up to $200 for individuals, and $400 for married filing jointly. A list of qualifying organizations can be found at http://www.azdor.gov/TaxCredits/CharitableTaxCredit.aspx. You can get both the CTODP and the Working Poor credits – what a great way to redirect your tax dollars to organizations you want to support! It also seems possible to donate to other private non-Catholic schools in Arizona, though you’d need to investigate this.

Though my experience has been in Arizona, other states offer such credits, to varying degrees. In my research I have come across Idaho, Michigan, and North Carolina, though one article I read claimed that about 20 states offer them. There are restrictions on the types of charities you can support – most are required to help the poor – so if your state offers a credit, get a list of qualifying organizations before donating somewhere. To learn about what your state offers, ask your tax professional, or if you’re doing your own taxes, the IRS has a link to each state web site at http://www.irs.gov/businesses/small/article/0,,id=99021,00.html. If you are in Arizona, information about the CTODP is at http://www.ctodp.org/, and information about the Working Poor Tax Credit can be found at http://www.azdor.gov/TaxCredits/CharitableTaxCredit.aspx.

It may be obvious, but state tax credits like this only benefit you if you pay state taxes. It’s important for you to know your tax liability, because the credit will only benefit you to that extent. For example, if you are only required to pay $350 in state taxes, and you donate $500 to a qualifying charity, you will not get that extra $150 back. In Arizona, however, you can carry forward any unused credit for up to five years. If your income has remained steady, you can look at last year’s state tax return to get an idea of what your tax liability is this year.

If your state offers credits you qualify for, this is a good time to change your paycheck withholdings since we just started a new year. It’s also a good time to make a resolution to support some good work!

If you’re curious about the history of this type of tax credit, some articles of interest can be found at http://pewforum.org/publications/articles/charitytaxcredits.pdf or http://learningtogive.org/papers/paper63.html.

Take the credit!

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