Arizona’s Scholarship Tax Credit Program

Overview

Parents are primarily responsible for the education of their children and have the right to make educational decisions for their children. Center for Arizona Policy (CAP) supports a parent’s right to choose from a wide variety of school options, including public, charter, private, online, or home education. Parents are in the best position to make these choices, as they are most familiar with the personalities, learning styles, and interests of their children.

Arizona is a national leader in school choice, and the scholarship tax credit program is one key way that our state has made it possible for thousands of students to attend the schools that their parents believe are best. In Arizona, four scholarship tax credit programs provide opportunities for more than 30,000 children: the individual tax credit, the individual PLUS tax credit, the corporate tax credit, and Lexie’s Law.

In fiscal year 2012 alone, nearly 77,000 taxpayers claimed the individual credit, for a total of about $52 million. Forty-nine school tuition organizations (“STOs”) awarded 23,959 scholarships from individual tax credit donations, totaling almost $46 million.[1]

Issue Analysis

Individual Tax Credit[2]

Donors may receive a state tax credit against their personal income tax for donations to an STO up to $517 for an individual and $1,034 for a married couple. The credit is non-refundable but may be carried forward for up to five consecutive years to offset the taxpayer’s liability. The amount of the credit is increased each year by the consumer price index (but remains the same if the CPI goes down).

The statute states that the credit is in lieu of any deduction pursuant to section 170 of the IRS code (the section which allows an individual taxpayer to take a deduction for charitable contributions) “and taken for state tax purposes.” There is a difference of opinion among tax professionals as to whether this language permits a taxpayer to take both the state credit and a federal deduction with respect to the same donation. In any event, Arizona tax forms require donors to add back in any federal deduction for charitable contributions for which a state tax credit is being taken.

Employers may provide the opportunity for employees to have the amount of the credit applied against their payroll withholding tax. While legally permissible, major payroll companies have been unresponsive to attempts to implement this due to the extra paperwork and hassle.

A donor may not take the credit for a donation made for his or her own dependent. Donors also may not make a contribution conditioned upon it being used for a specifically-designated student. Donors may not “swap” donations with another taxpayer, where each gives for the benefit of the other’s child.

Donors may make a contribution up to four months after the close of the tax year (generally, April 15) that counts against the previous year’s tax liability.

tax credit chart

Source: www.azto.org/faqs

Individual PLUS Tax Credit[3]

During the 2012 legislative session, the Arizona legislature passed and the Governor signed a bill creating a new individual tax credit titled the “PLUS Tax Credit Program.” This new tax credit allows for donors to receive an additional credit against their personal income tax for donations to a school tuition organization (STO) up to $514 for an individual and $1028 for a married couple.

A donor may not claim a credit under this new program and also under the original Individual Tax Credit with regard to the same contribution. If a donor’s contribution to a school tuition organization exceeds the amount of the credit allowed under the original Individual Tax Credit, a donor may claim a credit under the PLUS Tax Credit Program.

Statute requires that this new tax credit is applied to students that are “switchers” from a public to a private school, and STOs accepting donations toward the new tax credit must give priority to students and siblings of students on waiting lists where possible.

The same statutory conditions and requirements that apply to the original Individual Tax Credit apply to the new PLUS Tax Credit Program.

Operating Requirements for STOs That Accept Contributions from Individuals[4]

Donations to STOs are only eligible for a tax credit if the STO is certified by the Department of Revenue (DOR). To be certified by the DOR, the STO must certify that it operates in compliance with the specified regulations. DOR maintains a list of certified STOs and may revoke certification for non-compliance (after providing a reasonable opportunity to cure the infraction).

The basic requirements for STOs are the following:

  • Must be an organization that is tax exempt or has applied for exemption under section 501(c)(3) of the IRS code.
  • Must use at least ninety percent of the funds it receives for scholarships for students to attend a private school chosen by their parents.
  • Must not limit the availability of scholarships to students of only one school.
  • Must not knowingly permit or facilitate taxpayers in prohibited activities such as “swapping.”
  • Must not award scholarships solely on the basis of a donor’s recommendation.
  • Must provide notice to donors in all of its materials about the previous two requirements (swaps not allowed, scholarship awards not based solely on donor’s recommendation).
  • Must consider financial need in awarding scholarships.
  • Must file an annual report with DOR with data on number and amount of donations received, number and amount of scholarships awarded, and – beginning in September 2011 – the amount of scholarships awarded to students whose families meet certain income requirements.
  • Must have an annual financial review if the STO receives less than $1 million in contributions and an annual financial audit if the STO receives more than $1 million.

Additionally, private schools may not accept scholarships beyond the total cost of educating a student.

Corporate Tax Credit (Original)[5]

Corporations may receive a credit against corporate income tax and insurance companies may receive a credit against their premium tax[6] for donations to school tuition organizations. The program has an aggregate cap, rather than a taxpayer donation limit. Like the individual credit, this credit is non-refundable but may be carried forward for up to five consecutive years to offset the taxpayer’s liability.

In order to make a donation, a corporation must first seek preapproval from DOR to ensure that the aggregate cap is not exceeded. Donations are preapproved on a first come, first serve basis. For the 2012 fiscal year, donations totaled $19,418,987. Looking at the 2013-2014 school year, the aggregate cap on corporate tax credit donations is $35,831,000. This cap increases by 20% each year.

As with the individual credit, the statute states that the credit is in lieu of any deduction pursuant to section 170 of the IRS code and taken for state tax purposes. The program also prohibits the taxpayer from taking a credit for a donation that is designated for the direct benefit of any specific student.

Co-owners of a partnership may claim their pro rata share of the credit based on ownership, but the total credit for all owners must not exceed the donation amount.

Prior to 2012, schools that received scholarships under the corporate program were required to administer a national norm-referenced standardized test and make the aggregate results available to the public. This onerous requirement was removed by a CAP-supported bill in 2012; however, the schools must still fingerprint their employees.

Operating Requirements for STOs That Accept Corporate Donations[7]

STOs that accept corporate donations have most of the same operating requirements as those that accept individual donations, but there are a few additional restrictions.

The STOs must be certified by DOR, must allocate at least 90% of their annual revenue in scholarships, must file annual reports with DOR, and must allow DOR to verify that scholarships were given to eligible students.

The major differences between the individual program and the corporate program are in who is eligible to receive a scholarship. Under the corporate program, students may only receive a scholarship if they are “switchers” from a public to a private school and if their family income meets the threshold of 185% of the free and reduced price lunch program.

Household Size

Income Threshold

(185% of free and reduced price lunch)

1

$39,325

2

$53, 083

3

$66,842

4

$80,600

5

$94,359

6

$108,117

7

$121,876

8

$135,634

Each additional member

$13,758

*For the 2013-14 school year.

A student who receives a scholarship continues to be eligible for the program in subsequent years as long as he or she continues to be enrolled in a qualified school.

Scholarship amounts are also limited in the corporate program, and the limit increases by $100 each year. Currently, the limits are $4,900 for grades K-8 and $6,200 for grades 9-12.

If a student leaves the qualified school in the middle of the year, the school must refund a prorated amount of the scholarship. The STO must re-award those funds in the following year.

Lexie’s Law (Corporate Tax Credit Program for Disabled/Displaced Students)[8]

In 2009, the Arizona Supreme Court struck down the state’s voucher program for students with special needs and students in foster care. Lexie Weck was one of 473 students that either had special needs or were in the foster care system and that were dependent on the state’s voucher program at the time it was struck down by the court. Center for Arizona Policy (CAP) supported the creation of Lexie’s Law to create a new corporate tax credit program to assist this population of students.

Operating Requirements for STOs That Accept Lexie’s Law Donations

The Lexie’s Law program operates in nearly the same way as the original corporate program. The two differences are in scholarship eligibility and the aggregate cap.

Lexie’s Law has an aggregate cap of $5,000,000. This cap does not increase.

In order to be eligible for a scholarship, students must be a “switcher” from a public to a private school or have received a voucher under the program that was struck down.

The only students who may receive scholarships under this program are those who have been placed in foster care at any time before graduation from high school or who have been identified as having a disability under state or federal law.

A student who receives a scholarship continues to be eligible for the program in subsequent years as long as he or she continues to be enrolled in a qualified school.

A taxpayer may not take a credit under the original corporate program and Lexie’s Law for the same donation, but a taxpayer could give separate donations under each program.

Resources for Parents

Information about STOs and scholarships is available from the Arizona School Tuition Organization Association (www.astoa.com).

Because most schools work with specific STOs, parents who are seeking a scholarship should contact the school to which they wish to send their child.

Make a Donation

Visit Arizona Christian School Tuition Organization (www.acsto.org) or TOPS for Kids (www.topsforkids.com) to make an individual tax credit donation. TOPS for Kids and School Choice Arizona (www.schoolchoicearizona.org) accept corporate and Lexie’s Law donations.

Talking Points

  • Everyone wins with the scholarship tax credits – the State saves money and parents are empowered to choose what is best for their child’s education. The average scholarship amount is a fraction of the amount spent to educate each child in the public schools, so the state is saving thousands of dollars for every student that uses a scholarship to attend a private school.
  • When it comes to education, one size doesn’t fit all. That’s why it’s important for parents to have options when deciding how to educate their children.
  • The Arizona Scholarship Tax Credit program has been an extremely successful program. School choice programs in Arizona have flourished because they empower parents to choose the best school for their children.
  • Kids like Lexie deserve the opportunity to receive an education that their parents choose for them and that actually works. Parent after parent of students participating in the program reports on the tremendous progress these students can make if they are placed in the right environment for learning.

Conclusion

Arizona’s scholarship tax credit program is critical for thousands of Arizona families to be able to exercise their school choice. Continuing to expand these vital programs will bring even greater empowerment to families, benefiting the future of our state for generations to come.

 

© January 2014 Center for Arizona Policy, Inc. All rights reserved.
This publication includes summaries of many complex areas of law and is not specific legal advice to any person. Consult an attorney if you have questions about your specific situation or believe your legal rights have been infringed. This publication is educational in nature and should not be construed as an effort to aid or hinder any legislation.


[1] Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity FY 2012, Arizona Department of Revenue (2012), available at www.azdor.gov/Portals/0/Reports/FY2012%20private%20schl%20tuition%20org%20crdt%20rept.pdf.

[2] Ariz. Rev. Stat. § 43-1089.

[3] Ariz. Rev. Stat. § 43-1089.03.

[4] Ariz. Rev. Stat. §§ 43-1601 through 1605.

[5] Ariz. Rev. Stat. § 43-1183.

[6] Ariz. Rev. Stat. § 20-224.06.

[7] Ariz. Rev. Stat. §§ 43-1501 through 1507.

[8] Ariz. Rev. Stat. §§ 20-224.07 and 43-1184.