|Overview Of The Traansfer Credit|
|What Is A Failing School?|
|Who Is Eligible For The Credit?|
|How Will The Credit Be Implemented?|
|A Comprehensive Example|
In March of this year, the Republican majority that controls both houses of Alabama's Legislature pushed through The Accountability Act of 2013 (HB 84) accompanied by late-night drama, parliamentary shenanigans, and vociferous, but futile, protests from minority Democrats. The Legislature then passed a set of amendments to the act (HB 658) at the end of the session on May 20, and in so doing, failed to heed a request from Republican Governor Robert Bentley to delay the tax credit provisions in the bill for two years to give the Legislature and the people time to reflect on its implications. HB 84 also includes language relating to granting greater flexibility to local school boards in personnel and curriculum planning.
The tax provisions of the new law are quite controversial, but unless some court acts to delay or repeal them, they will go into effect with the opening of school in August of 2013, so it is worth spending some time to analyze them. There are two main provisions: (1) Tuition vouchers in the form of income tax credits to parents transferring their children from a Failing School to a NonFailing Public School, or to a NonPublic private or parochial school (The Transfer Credit); and (2) Tax credits to individuals and corporations for donations to certain Scholarship Granting Organizations (SGOs). This article will address only the Transfer Credit, and a later article will discuss the credit for donations to SGOs. All section references in the article, unless otherwise noted, will be to HB 84, as amended by HB 658 (The Act).
§8(a)(1) states that the parent of a child who is either attending or assigned to attend a Failing School (see below), and who enrolls in a Nonfailing Public School or a Nonpublic School, can receive a credit against Alabama income tax to partially offset the cost of transferring to the new school. The amount of the credit is the lesser of
Note: There are very few private or parochial schools in the state with annual tuition cost under $3,500, so it is expected that the credit will generally be about $3,500 in today's dollars. Since the actual cost of attending another public school will usually be zero, families who choose this option will get no tax credit.
The parent is to receive the full amount of the credit in the year granted, either as an offset against Alabama income taxes otherwise due, or as a "refund or rebate" in cases where the credit amount exceeds the Alabama tax liability for the year. In other words, even if the credit granted is greater than the parent's Alabama tax liability, the parent will receive the full benefit of the credit in the year granted, either as an offset against Alabama taxes owed, or as a refund or rebate of the excess.
In the case of a student transferring to a private or parochial school, the funds for the credit are to come from the Failing School's allotment from the Special Education Trust Fund (SETF), and the Failing School will continue to receive 20% of its former allocation. If the student transfers to a NonFailing Public School, the new school will add the student to its number count, and effectively 100% of the Failing School's SETF allotment goes to the new school
The term Failing School is defined by §4(3) to refer to a public school which meets any one of three criteria:
The third criteria is in effect only through May 31, 2017, at which time it is expected to be replaced by a new "A,B,C,D,F" grading system for public schools which the Legislature passed in 2012. >
On June 18, 2013, State School Superintendent Tommy Bice released a list of 72 Alabama schools that met the 3-years-out-of-six criteria (The §4(3)(iii) List), as well as a list of 14 persistently low performing schools (The §4(3)(i) List). Eight schools appeared on both lists, leaving a total of 78 schools designated as Failing Schools.
In §8(b)(1), the Legislature defines circumstances under which parents can be eligible for the Transfer Credit with respect to their children transferring from a Failing School. There are three enumerated:
It is important to note that the Alabama law, unlike similar measures passed in some other states, has no income limits attached to the eligibility for the credit. Any Alabama parent, regardless of how wealthy they are, can receive the Transfer Credit.
On the same date that the Superintendent made his announcement, the Alabama Department of Revenue (DOR) announced that the credit would not be available to parents of children who are already attending private schools, even if they are zoned to attend a Failing School.
Once a parent transfers his child from a Failing School to a private or parochial school and receives the credit, he is entitled to continue to receive the credit for the number of years the child would have stayed at the Failing School (§8(b)(3)). For example, if a first grade student transfers to a private school from ABC Elementary School in a year when ABC is a Failing School, that student's parents will continue to receive the credit through the sixth grade, assuming that ABC is a K-6 school. The law makes it clear that even if ABC is no longer a Failing School in the later years, the parents will continue to be eligible for the tax credit for as long as their child would have attended ABC.
What happens after is a little murkier. The statute seems to state that if the child is assigned to attend a failing school for her 7th grade year, the parent may enroll her in a private school of his choice, and receive the credit. The actual language of §8(b)(3) is
"… The parent of such a student shall no longer be eligible for the income tax credit after the student completes the highest grade level in which he or she would otherwise have been enrolled at the failing school. Notwithstanding the foregoing, as long as the student remains enrolled in or assigned to attend a failing school the parent may again transfer the student to a nonfailing public school or nonpublic school of the parent's choice and request and receive an income tax credit as provided in this section." (Emphasis added)
DOR released a set of regulations on this topic concurrently with their June 18 announcement. The regs seem to say that the student must be actually transferring from a Failing School in order for the parent to claim the credit. There are certain exceptions provided, but none of them would apply to the example above. The exceptions refer to
The inference from the regs is that the parents of a child who is attending a private school, and who has completed the highest grade of the original Failing School, will not be eligible for the credit for attendance at a private school for the next year, regardless of the status of the public school the child would be assigned to. This is clearly a point that will be debated and possibly litigated during the coming months.
Alabama's Department of Revenue (DOR) has not had time to issue any regulations as to how the Transfer Credit will be implemented, but presumably the credit will be listed on Alabama Form 40 with the other credits the state recognizes. §8(a)(2) does state that the parent claiming the credit will be required to certify
Jill Parent has a six-year-old daughter named Judy, who just finished kindergarten at Northwest Elementary, a K-5 school that is designated as a Failing School. Jill elects to take Judy out of Northwest, and enroll her in the Wideacre School, a local K-8 private school that has announced that it will accept students making such transfers pursuant to The Act. Wideacre's annual tuition and mandatory fees for first grade students is $6,000, with $3,000 payable in August, and the balance due in December. It is assumed that 80% of the average annual per pupil cost for public school students is $3,500.
Jill makes the required payments to Wideacre School in August and December of 2013, and Judy attends Wideacre throughout the 2013-14 school year. Jill files her 2013 Alabama income tax return in March of 2014, and on that return she claims a credit under the Accountability Act, attaching all of the required documentation. Other than the Transfer Credit, Jill's 2013 Alabama return shows total Alabama tax of $5,000 and Alabama withholding of $3,000. Jill will get an Alabama refund of $1,500 as shown in the schedule below.
The overall effect for Jill (if you disregard the time value of money) is that Judy's year of private schooling has cost Jill a net of $2,500, as shown below.
Jill may continue to send Judy to Wideacre School through the 5th grade, and receive the credit, even if Northwest is no longer a Failing School for one or more of those later years. As discussed above, it is not totally clear what happens if Judy is assigned to another Failing School for her 6th grade year.
There are still other unanswered questions about the Transfer Credit, including whether and how its provisions may be altered by court actions. Another issue to be resolved is how many private schools will choose to accept transfers under the Act. Several heads of private schools have already stated that they are reluctant to participate in the program due to the exposure to some level of oversight by the State Board of Education that would accompany it. At this point, we can only wait and see.
As is always the case, you should consult your personal tax advisor before taking any actions with regard to the material in this article. Differences in personal circumstances and in local conditions could have a material effect on the outcomes of any tax strategy.
The assistance of Bonnee Bailey, CPA in reviewing this article is greatly appreciated. Any inaccuracies that remain are strictly the responsibility of the author.
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