California College Access Tax Credit
California recently enacted the College Access Tax Credit (“CATC”) in an effort to rebuild the state’s investment in education. The CATC was enacted in conjunction with the College Access Tax Credit Fund (“Fund”), which is a specially created fund that will be used to provide additional Cal Grants to eligible students. Under the CATC legislation, a taxpayer who contributes to the Fund may claim a California tax credit against a significant portion of the taxpayer’s income and franchise taxes during tax years 2014 through 2016.
What is the new credit?
For tax years beginning on or after January 1, 2014, and before January 1, 2017, a California corporation franchise or personal income tax credit is allowed for cash contributions made to the Fund. There is no explicit limit on the amount a taxpayer may contribute, but the contributions must be made in cash.
The credit is awardable as follows:
- For the 2014 taxable year, 60% of the amount contributed, as allocated and certified by the California Educational Facilities Authority (“CEFA”).
- For the 2015 taxable year, 55% of the amount contributed, as allocated and certified by CEFA.
- For the 2016 taxable year, 50% of the amount contributed, as allocated and certified by CEFA.
If the amount of credit allowed exceeds the amount of tax owed by a taxpayer in that same year, the excess credit may be carried forward up to six years. No deductions will be allowed on the state tax return for amounts taken into account in calculating the credit (charitable contribution deduction will be allowed for federal purposes).
The maximum total amount of credit that may be allocated and certified throughout the state in any calendar year is $500 million, plus any previously unallocated and uncertified amounts.
How can taxpayers take advantage of the credit?
To receive the credit, taxpayers must have the Fund contribution certified by CEFA. Pursuant to the CATC legislation, CEFA must certify the contribution amount eligible for the credit within 45 days following receipt of the taxpayer’s contribution. The CEFA is meeting at the end of October to determine the application process. We expect that the CEFA will publish this guidance in early November.
What is the economic benefit of the credit?
The benefit of the credit will depend upon each taxpayer’s profile. For example, assume in 2014 an individual taxpayer makes a $100,000 cash contribution to the Fund that is certified by CEFA as eligible for the credit. The taxpayer would be entitled to a $60,000 credit applied against his or her net income tax liability in California. In addition to the $60,000 CATC, the taxpayer may also take a charitable contribution deduction for federal tax purposes. The value of the federal deduction may differ depending upon whether the taxpayer is subject to charitable contribution limits, itemized deduction phase-out or the alternative minimum tax (AMT). To simplify our example, we assume that the taxpayer may deduct the entire amount of the contribution for regular federal income tax purposes.
Assume the taxpayer is not subject to AMT and has a marginal federal tax rate of 39.6%. The $100,000 contribution deduction may result in $39,600 in federal income tax savings. However, the $60,000 credit will also reduce the taxpayer’s state income tax deduction. This lost deduction would increase the taxpayer’s federal tax by $23,760. Accordingly, the taxpayer makes a $100,000 charitable contribution and receives a net tax benefit of $75,840.
Assume the same taxpayer is subject to AMT at the highest rate of 28%. The California credit received on the $100,000 contribution is still $60,000. The taxpayer’s federal tax benefit for the $100,000 contribution at the 28% rate is $28,000. Because state income taxes are not deductible under AMT, the state tax credit has no federal tax impact. Thus, the taxpayer makes a $100,000 charitable contribution and receives a net tax benefit of $88,000.
How can Andersen Tax help?
Andersen Tax may assist in determining the value of any contribution particular to each taxpayer’s unique circumstances. We will also monitor the procedure for claiming the credit. With a limited pool of funding, we recommend that any taxpayer considering this contribution take early advantage of the application process once it becomes available.