Illinois’ July 2017 Revenue Bill for the 2018 fiscal year included the Invest in Kids Act (Act), which creates a new program, effective January 1, 2018, that provides up to $75 million in income tax credits for Illinois taxpayers making contributions to eligible organizations that grant scholarships to students attending private and parochial schools in Illinois. The Act allows approved Illinois taxpayers to receive state income tax credits of 75 percent of their total qualified contributions to Scholarship Granting Organizations (SGOs), up to $1 million annually per taxpayer. For example, a contribution of $100,000 to an SGO allows an approved taxpayer to claim a $75,000 income tax credit. The program is administered by the Illinois Department of Revenue (Department). The Department will allocate the credits among taxpayers on a first-come, first-served basis.
The Act is intended to benefit students who are members of households whose federal adjusted gross income does not exceed 300 percent of the federal poverty level before the scholarship and does not exceed 400 percent of the federal poverty level once the scholarship is received. The Illinois State Board of Education will annually provide the Department with a list of eligible private and parochial schools that may participate in the program and receive scholarship contributions from SGOs. As of December 18, 2017, the list of eligible private and parochial schools for 2018 has not been published.
What Organizations Can Receive Contributions?
An SGO is a non-profit that can receive qualified contributions from individuals and businesses to be disbursed to qualified, private and parochial schools in Illinois for scholarships to eligible students. In order to become an SGO, the organization must: 1) be exempt from federal tax under Section 501(c)(3) of the Internal Revenue Code; 2) use at least 95 percent of the qualified contributions it receives for scholarships; 3) provide scholarships to students according to the Act’s guidelines; 4) hold the qualified contributions, and any resultant income, separately from the organization’s other funds until use; and 5) be approved to issue Certificates of Receipt to donors. The Department is currently accepting applications from organizations that wish to apply for SGO status for the 2018 tax year at www.tax.illinois.gov. The application deadline for the 2018 ‒ 2019 school year is January 15, 2018. SGOs must apply for renewal each year.
How Can Taxpayers Get Approval for Tax Credits?
Illinois taxpayers must apply to the Department for approval to make qualifying contributions. Taxpayers must have a registered MyTax Illinois account in order to apply for the credit. Interested persons who do not have a MyTax Illinois account should apply for one as soon as possible at tax.illinois.gov to avoid processing delays, as the credit is approved on a first-come, first-served basis.
The Act requires credits to be awarded by regions whose boundaries are the same as the five Illinois Appellate Court Districts (illinoiscourts.gov). Contribution approval will be automatically granted as long as the regional and statewide thresholds have not been met. If the $75 million cap on the total credits that may be awarded is not reached by June 1 of a given year, the Department will award the remaining credits on a first-come, first-served basis, regardless of the regional limitation. Taxpayers can apply for the credit through MyTax Illinois beginning on January 2, 2018. Interested taxpayers should promptly apply for the credit as soon as allowable because we anticipate these credits will be quickly exhausted.
Once approved, the Department will issue taxpayers a Contribution Authorization Certificate. Within 60 days of approval, taxpayers must provide a copy of the Contribution Authorization Certificate, along with the full contribution to the SGO identified. The SGO will then issue the taxpayer a Certificate of Receipt within 30 days of receiving the contribution. Unused credit amounts may be carried forward for five years. The credit is not refundable.
Federal Deduction Exclusion
The Act provides that no credit shall be taken for any qualified contribution for which the taxpayer claims a federal income tax deduction. In its emergency regulations related to the Invest in Kids Credit, the Department states that, “[a] credit awarded under the Invest in Kids Act may not be claimed for any qualified contribution for which the taxpayer claims a federal income tax deduction.” One of the examples provided in the proposed regulation clarifies that if any portion of a contribution is federally deducted, none of the contribution may be claimed as an Invest in Kids Credit. In other words, a taxpayer can either claim a federal charitable income tax deduction for the entire qualified contribution OR the Illinois credit under the Act – NOT both. The emergency regulation was effective as of November 13, 2017.
The Department provides additional information regarding the Act available here.
This summary is intended to alert Illinois taxpayers to an important change in law but should not be relied upon for a taxpayer’s specific tax planning purposes. Taxpayers should consult with their tax advisers regarding the implications of the Act on their individual situations.