The Rocket City Scholarship Granting Organization (SGO) is a Huntsville and North Alabama based 501(c)3 charitable organization. Jessica Smith, Longview’s Vice President and Director of Financial Planning, currently serves on Rocket City SGO’s Board of Directors.
What is a Scholarship Granting Organization?
Scholarship Granting Organizations (SGOs) were made possible by the Alabama Accountability Tax Act of 2013. The intent of the legislation is to allow flexibility in meeting children’s educational needs, improving education performance, encouraging innovation in meeting the needs of school systems, and providing financial assistance through Alabama income tax credits. The SGOs were created to grant scholarships to eligible students at failing public schools so they may transfer to a private school. The scholarships are provided to students who qualify based on family income requirements. Taxpayers make a contribution to the SGO. The SGO facilitates the process of connecting the student in need with the scholarship.
How does the tax credit work?
Taxpayers who make a donation to an SGO qualify for a state tax credit of 50% of their state income tax liability, up to $50,000. C corporations also qualify for a 50% credit, but there is not a maximum limit on the amount of the credit. Taxpayers may also claim the donation as a charitable contribution on their Federal tax return. For some, this is just a zero-sum game. The taxpayer receives a credit from the state, which lowers the state tax deduction by the same amount of the federal charitable deduction taken. However, for those who pay Alternative Minimum Tax (AMT), it actually results in additional savings because state taxes are disallowed for the AMT calculation, while charitable contributions are not.
Let’s look at an example:
Bill and Eve have a $3,000 Alabama state tax liability for 2016. They make a contribution to a qualifying SGO of $1,500 (50% of their state income taxes). The SGO uses the donation to grant a scholarship to a qualifying student. In 2017, when Bill and Eve complete their tax returns, they claim the $1,500 contribution as an Alabama tax credit, effectively cutting their taxes in half. They also claim a $1,500 charitable contribution on their Federal Schedule A.
Alabama initially earmarked $25 million for these credits. It has since been increased to $30 million, but the credits are taken on a first come, first serve basis, subject to verification by the SGOs. If you exceed the allowable credit limit in the year the donation is made (50% of state tax), the unused part may be carried over for up to three years.
You can visit Alabama Department of Revenue’s accountability website for information about SGO’s throughout Alabama. You will also find a full list of participating schools and rules about contribution.
For more information about Rocket City SGO, visit their website at rocketsgo.org.
