California Tax Planning Part 1 – Turn your Charitable Deductions into Charitable Credits

Although most tax planning contemplates minimization of your IRS tax bill, there are other strategies for reducing your ever-increasing California income tax bill too.

Part 1: Make a donation to the California College Access Tax Credit Fund, which funds the Cal Grant Program.

Donations to the California College Access Tax Credit Fund are deductible on your federal return and 60% of your donation is a credit on your California tax return.  As will be explained below, the transformation of a deduction into a credit provides more bang for your charitable buck and provides an opportunity for those who have already reached their limit on deductible charitable contributions in 2014 to continue giving to charity while receiving valuable tax benefits in return.

Normally, deductions reduce your tax bill by your marginal rate while credits provide a one-for-one reduction of your tax bill. For example, assume $100 of income, $50 of deduction, and a 25% tax rate.  In this scenario, your tax bill is $18.75.

100 Income

(25) Deduction

——

75  Net Income

x 25%

——

18.75 Tax bill

Assume instead that your $25 of deduction is actually $25 of credit.  In this scenario, your tax bill is zero.

100 Income

(0)   Deduction

—–

100 Net Income

x 25%

—–

25 Pre-Credit Tax Bill

(25) Credit

—–

0 Tax Bill

With this tax credit, the credit is only worth 60% of the donation amount, so instead of a zero tax bill, the tax bill would instead be $10, which is still less than the $18.75 tax bill from the first scenario.

As you can see, credits are much more valuable than deductions, which reduce your tax bill at a lower rate and which can be phased out depending upon your income level.  This tax credit is being phased out over 3 years (the credit about is 55% in 2015, 50% in 2016, and disappears in 2017) and cannot be used to reduce Alternative Minimum Tax, although unused credits carryover for 6 years.

If you have any questions about how a donation to this Tax Credit Fund will affect your individual tax situation, please contact us to set up a consultation.

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