The following are answers to frequently asked questions (FAQs) regarding tuition tax credit and tax deduction programs. The answers to these FAQs are intended to provide only an introductory overview of key issues.
What Are Tuition Tax Credits and Tax Deductions?
School tax credits refund expenses made toward education up to a fixed figure. Tax deductions minimize the expense of education by making them itemized deductions. The qualifying criteria cover educational expenses such as tutoring, texts, and computers, and, in the states that have them so far, private school tuition. State legislation determines the amount of credit and what can be included in the deductions. It also states whether private school tuition qualifies.
Education tax programs fall into one of two categories. The first is a personal use credit, which allows individual families to reduce their tax liability. The second category is a donation tax credit, which allows individuals and businesses to reduce their tax liability by contributing to organizations that disperse funds to families to help them pay for their children's education.
Won't These Programs Only Benefit the Wealthy?
No, in fact, the opposite is true. Because donation tax credits create a pool of funds that is explicitly meant to help families pay for their children's education, they offer more opportunities for low-income families to have the same choices in schooling that their wealthier counterparts enjoy.
Are Tax Credits Vouchers?
No. Although they are similar, tax credit and voucher programs are different in important ways. Tax credits reward parents and business owners for contributing their own money to educate children. Vouchers are given to families by states and localities to give parents the ability to choose where their children will attend school.
Where Can I Find Them?
Arizona - Arizona offers two types of donation tax credits. The first is a personal tax credit that allows individuals to claim a dollar-for-dollar credit of up to $500, and married couples filing jointly may claim up to $1,000 on donations to "school tuition organizations." In 2006, individuals contributed a total of 51 million dollars to this program, resulting in 24,678 scholarships. Arizona also enacted a corporate tax credit in 2006 that allows businesses to receive a dollar-for-dollar credit on their taxes, with a statewide cap on the program of 10 million dollars. The cap will rise by 20 percent in successive years. Click here for more information about Arizona's tax credit programs.
Florida - Florida has a donation tax credit called the "Step Up for Students Corporate Tax Credit Scholarship Program." This program allows corporations to receive a dollar-for-dollar credit for up to 75 percent of its total tax liability for donations to scholarship funding organizations, with a maximum of 5 million dollars per organization. In 2006, corporations donated a total of 86 million dollars, creating 17,000 scholarships for students. For more information please visit the Step Up for Students Website.
Georgia - Georgia created a donation tax credit program in 2008, which gives parents access to millions in scholarship dollars to send their children to private schools. The tax credit program allows individuals and businesses to donate some of their state tax liability to organizations offering private school scholarships for students in grades K-12. Businesses can donate up to 75 percent of their income tax liability, individuals can donate up to $1,000, and couples can donate up to $2,500 of their state taxes. For more information, visit the Georgia Department of Education Website.
Illinois - The state of Illinois offers a personal use tax credit called the "Illinois Tax Credit for Educational Expenses." This program allows parents to claim a 25 percent credit on expenses over $250 per child, with a maximum credit of $500. In 2003, 194,000 families took advantage of this program. Click here for more information about the Illinois Tax Credit for Educational Expenses.
Iowa - Iowa is home to both a personal use tax credit and a donation tax credit. The personal use tax credit is called the "Iowa Tuition and Textbook Credit" and it allows parents to claim a 25 percent credit on the first $1,000 spent per child. In 2005, 183,000 families took advantage of this credit. The donation tax credit is called the "Iowa School Tuition Organization Credit" and it allows individuals to receive 65 percent of their donation to a School Tuition Organization as a credit. This program was capped at 2.5 million in 2006, but has increased to 7.5 million in 2008. Click here for more information about Iowa's Tuition and Textbook Credit and School Tuition Organization Tax Credit.
Louisiana - Louisiana recently created a personal-use tax deduction that allows families to deduct 50 percent of the total amount spent on tuition, fees and other expenses. The deduction is capped at $5,000 per child. For more information please visit Louisiana's Personal Tax Deduction for Education Expenses.
Minnesota - Minnesota is also home to a personal-use tax deduction. Created in 1955, the program has steadily increased so that parents may deduct $2,500 for each child in grades 7 through 12 and up to $1,625 for each child in elementary grades. In 2008, 222,000 families received deductions through this program. For more information click here: Minnesota's Personal-Use Tax Deduction for K-12 Education.
Pennsylvania - Pennsylvania is home to a donation tax credit program for corporations. The program, called the Educational Improvement Tax Credit Program, is worth 75 percent of a one-year contribution or 90 percent of a two-year contribution to "Scholarship Organizations" or "Educational Improvement Organizations." A corporation may donate $200,000 annually. In 2006-07, this program allowed the creation of 33,400 scholarships. Click here for more information about Pennsylvania's Educational Improvement Tax Credit Program.
Rhode Island - Rhode Island's donation tax credit is very similar to the one found in Pennsylvania. Rhode Island's program caps donations at $100,000, and corporations can claim 75 percent of that donation. If the corporation donates for two years, and the second year donation is at least 80 percent of the first years, the corporation may claim 90 percent of that donation. Statewide the program is capped at 1 million dollars. For more information please visit www.rischolarshipalliance.org.
South Dakota, Utah, Virginia, Idaho, Missouri, Oregon, and most recently, Maryland, have reviewed the idea.
We appreciate the hard work of Lindalyn Kakadelis of the North Carolina Education Alliance, the Milton Friedman Foundation for Educational Choice, and Adam B. Schaeffer of the Cato Institute who provided much of the background information about the specific programs for each state. For further reading, please see the following:
Education Tax Credits in North Carolina: Innovation in Education, Lindalyn Kakadelis, the North Carolina Education Alliance, April 7, 2008.
The Public Education Tax Credit, Adam B. Schaeffer, Cato Institute, December 5, 2007.
Personal Tax Deduction: Louisiana, Milton Friedman Foundation for Educational Choice, retrieved April 2008.
