School-Choice Tax Credit Gets Big Boost from Treasury

Dow Jones
10/01

WASHINGTON-The Treasury Department will let married couples count as two taxpayers for a novel school-choice tax credit, significantly expanding a program that is expected to funnel tens of billions of dollars to private and public schools.

Under rules proposed Thursday, married couples who donate $3,400 to certain scholarship granting groups can get a full dollar-for-dollar tax credit. That essentially lets them direct $3,400 of their federal income tax bill to the school-choice program rather than to general government operations.

Last year's tax law, which created the program, set a per-taxpayer cap of $1,700. Many people watching the issue closely had expected the $1,700 limit to apply to married taxpayers filing jointly.

The change will make the school-choice program cost significantly more to the government in foregone revenue than previously expected. By 2030, the Treasury Department estimates that 11 million taxpayers will contribute a total of $26 billion a year to scholarship groups, giving them up to $26 billion in tax credits and funding up to 2.2 million full-time scholarships.

Treasury's rules will also make it easier for scholarship groups to hit their fundraising targets because they won't have to reach as many donors.

"It's a positive shift from what we anticipated, and it materially changes both the fundraising upside and the messaging for how scholarship granting organizations can reach tax filers," said Norton Rainey, chief executive of ACE Scholarships, a Colorado-based scholarship-granting group.

The school-choice credit starts in tax year 2027, and it is unlike anything else in the federal tax code.

Scholarship-granting groups will collect donations and then provide money to families with up to 300% of area median income. They are starting to prepare fundraising pitches in advance of the 2027 tax year, and the $1,700 and $3,400 cap on the credit means those solicitations must reach a broad group of people. (Donors can't direct money to their own children.)

Much of the money is expected to go to private school tuition for students in kindergarten through 12th grade. Public-school students will also be eligible for scholarships for services such as tutoring, and public schools have been trying to figure out how to take advantage of the program. Groups affiliated with public schools could become attractive, cost-free ways for donors to support those institutions.

States must decide whether they want to participate, and 30 states already chose to join, according to the Treasury Department. The state decision determines whether students can benefit; taxpayers in states that don't opt into the program can still donate to groups in other states and still get the federal tax credit.

Individuals' donations won't generate regular tax deductions for charitable contributions. Instead, the donations will qualify for a 100% nonrefundable tax credit, up to the $1,700 or $3,400 cap. That means taxpayers can only get the tax break to the extent that they have income-tax liability, but unused credits can be carried forward for five years.

The credit, said Treasury Secretary Scott Bessent, "marks a new chapter in educational freedom and opportunity by establishing America's first nationwide school choice program and empowering states to give students and families more options."

 

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