California law now allows taxpayers to claim a credit for donating to the Cal Grant B program. The program helps low-income students in the state pay for college books and housing. In an effort to increase the amount of money and the number of students who benefit, lawmakers developed a plan that also benefits taxpayers.
As we said in our last post, a donation can lower your tax bill in a couple of ways. On your state tax return, you can use it for a tax credit, or you can report it as a charitable deduction. You may not do both. That's not to say that you can't report the donation as a charitable deduction on your federal tax return.
So what is a tax credit? A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. In this case, the credit is 60 percent of the donation for 2014. Say you send $1,000 to the College Access Tax Credit Fund. Your return shows that you owe $5,000 to the state. You then deduct 60 percent of your donation -- $600 -- from your tax bill for the amount you must pay. The bill is reduced to $5,400.
That's the theory. In practice, there are a few hoops to jump through. taxpayers will have to apply for the credit and be certified before they make a donation to the fund. To make the plan work, the state needs to limit the dollar amount of tax credits to no more than $500 million.
Another quick caveat: Generally, a tax credit cannot reduce a tax liability to less than $0. In the example above, then, if the tax bill were $500, applying the tax credit would reduce the bill to $0.
How does this differ from a charitable deduction? We'll explain in our next post.
Source: SFGate, "Huge tax break for donating to California college students," Kathleen Pender, Oct. 3, 2014