The State of Arizona offers a number of tax credits to those who file an Arizona tax return. A tax credit is different from a tax deduction in that it is a dollar-for-dollar reduction of your tax liability (the amount you owe).
Most taxpayers familiar with these credits donate to their children's schools using the Public School tax credit. However, what most people don’t know is that there are a number of other tax credits they could be taking advantage of to lower their overall tax liability and direct their tax dollars to organizations that are important to them.
One of these tax credits is the Qualifying Foster Care Organization credit. For the 2016 tax year this credit has been increased to $1,000 for married filing jointly and $500 for those filing single. This credit can also be combined with other tax credits. For example, a couple filing jointly can contribute $400 to their child’s school and also contribute $1,000 to a qualifying foster care organization.
Also, taxpayers are not required to itemize in order to take advantage of these credits and there are currently no income restrictions.
It should be noted that this is not a refundable tax credit. This means that the credits can reduce your tax liability to zero, but if more was donated than there was tax liability, the remainder cannot be refunded. However, the remainder can be carried forward and used on future returns for up to five years.
For example: If a couple filing jointly donates $1,000 to A Mighty Change of Heart on December 31, 2016, they will receive a $1,000 credit on their Arizona tax return when they file in 2017. If they have a tax liability, it will be reduced by $1,000. If they have no tax liability, or a liability of less than $1,000, the remaining amount will be carried forward and used in the next tax year for up to five years.
Another advantage to using the tax credits is that in addition to receiving a dollar-for-dollar reduction in state tax liability, the donations may also be allowed as a deduction on a filer's Federal tax return.
Continuing with the previous example, if this same couple itemizes on their Federal tax return, they can claim a $1,000 tax deductible contribution to a not-for-profit and receive an additional reduction of their tax liability equal to the percentage of their marginal tax bracket. If they were in a 25% tax bracket, they would receive an additional $250 reduction in Federal Tax owed and actually make a profit by donating.
For more information on Arizona tax credits visit: azdor.gov/taxcredits
*We recommend that you contact your tax advisor for questions regarding your specific situation and circumstances.