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Harvest Rock Advisors, LLC

Tax Credit Education - 08/31/2018

Happy Labor Day!  No other holiday stirs up such mixed emotions:  the end of summer, the official end of hot dog season (per the National Hot Dog Association) and house projects (ew), but it also marks the return of college football, a timely long weekend and cookouts.  Call me stubborn, but I will continue to wear white and eat hot dogs after Labor Day if I so choose.

Like most of our traditions, the history of Labor Day is rather interesting. 

The national holiday was created by President Grover Cleveland in June 1894 for crass political motivations.  Earlier that year, the infamous Pullman Company strike occurred in Chicago, in which thirty-seven people were killed in a fierce confrontation with federal troops and company henchman seeking to break the strike that was disrupting national railroad traffic.

Cleveland, worried about losing the labor vote in the fall 1994 mid-term election, moved quickly to sign into law a new federal holiday "honoring the American worker" and anointed the first Monday of each September to observe it.

Prior to the Pullman strike, the push for a Labor Day holiday was a movement led by fledgling labor unions to grow union membership and force better work conditions.  At the time, the average American worked twelve-hour days, six days per week.  The modern eight-hour work day was not established by law until 1916.

The first unofficial Labor Day event was held in New York City in 1882, featuring a parade and picnic, all organized by trade unions.  By all accounts it was a smashing success, including lots of beer consumption (!), and a new American tradition was established.

Surprisingly, business owners at the time were in favor of giving workers more time off and many embraced the new holiday.  It's hard to spend wage income if you work too much!

The topic of unions is like religion and politics – I don't go there in conversation.  So this weekend let's just celebrate the value of work and the substantial contribution the American worker has contributed to the nation's success, unrivaled in human history.

I intentionally left out "back-to-school" in the pros and cons of the Labor Day holiday because of divergent views:  Parents happy, kids not-so-much.  However, with school back in session, allow me to share a timely tax-planning topic that should interest all Pennsylvania residents:  education tax credits.

Many moons ago, Pennsylvania enacted a tax credit program that allows businesses, business owners and employees to earn state income credits by donating money to education institutions.  There is a loophole for employees of government and not-for-profit organizations:  if you own stock in a Pennsylvania-based publicly-traded corporation, you also are eligible for the tax credit.

There are actually two tax credit programs:  Education Improvement Tax Credit and Opportunity Scholarship Tax Credit that operate similarly.   Each program is awarded state funding as part of the annual budget process.  For fiscal year '18-19, which runs until June 2019, there will be $100 million of state tax credits awarded, a massive $80 million jump over last year.

Here's how it works.  You indirectly contribute money to an educational institution in Pennsylvania that charges tuition.  In addition to private schools, pre-kindergarten and other special programs associated with public schools are eligible to receive these cash donations.

In exchange, the donor gets a state income tax credit of up to 90% of the cash charitable donation.  Note that a tax credit is much more valuable than a tax deduction as it offsets your tax liability dollar-for-dollar.

As you might expect, there are several nuances associated with the tax credit program.  In addition to eligibility, the donation must be made through a special type of Pennsylvania-based business.  

Starting in 2015, the law was changed to allow for "Special Purpose Entities – SPEs" – to facilitate pools of charitable donations through a business entity awarded tax credits from Pennsylvania's Community Development agency.   The advent of the SPE entity has been a boon for the tax credit programs, making it much easier for the average donor to participate.

So the deal is a Pennsylvanians can earmark their state tax liability to an education entity of their choice.  Carrie and I just signed up for the tax credit program through the Central Pennsylvania Scholarship Fund, a not-for-profit organization with a network of twenty-one SPEs.  In exchange for a two-year commitment, we pledged $3,500 a year to pre-kindergarten programs in York City.

In return, we expect a 90% tax credit on our 2018 and 2019 Pennsylvania income tax returns – sweet deal!  Another nuance is that it is a use-it-or lose it proposition; if your state tax liability is less than the credit, the excess credit is forfeited, so it requires some good tax planning.

Another way to view the program is that instead of dumping hard-earned tax dollars into the government bureaucracy, you can steer it back into your local community to tangibly help kids.  That's a no-brainer decision, at least for us.

The other catch is that it is a first-come, first-serve program as these popular credits are expected to be fully awarded by this fall.

Prior to 2018, contributions to these tax credit programs earned the state credit and qualified for a full federal income tax deduction as well – nice.

For 2018, due to the new $10,000 deduction limitation on state/local income taxes for federal income tax purposes, the IRS just announced buzzkill new proposed regulations that limits the federal tax deduction to the amount of the program donation that does not get a state tax credit.  So if you give $1,000 and get a $900 state tax credit, only $100 would be eligible for a federal charitable tax deduction.  Rats.

Notwithstanding the federal tax law change, education tax credits remain an attractive option for Pennsylvania residents.

If you have an interest in participating in the Pennsylvania education tax credit program for 2018 (and live in Penn's Woods), reach out to your tax professional first and then us for assistance.

Until next time, be well…Tim

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