For years, states have explored various ways to give residents more options in education. One such method allows residents to redirect their state income tax liability to support local schools. As of 2024, six states offer programs like this: Pennsylvania, Virginia, Nebraska, Rhode Island, Alabama and Missouri.
This post focuses on Pennsylvania’s Educational Improvement Tax Credit program, explaining how it works, how it can benefit local Christian schools, and key practical considerations. Historically, Evangelical Christian private schools have received less funding through this program compared to other private schools, so increased participation is vital. Be sure to consult with a tax professional before proceeding.
What Is The PA Educational Improvement Tax Credit?
The PA Educational Improvement Tax Credit was enacted with bi-partisan support on May 7, 2001. Initially, the program provided tax credits to businesses that supported local schools, and was the first of its kind in the US. In 2014 Pennsylvania expanded the program to allow individual taxpayers to participate as well.
To qualify for the program, you must be a shareholder, partner, member or employee of a business entity authorized to do business in Pennsylvania.
The program allows participants to direct their Pennsylvania income tax dollars toward tuition assistance at private schools, in the form of scholarships for eligible students. Most of the credits are used to offer financial aid K-12 students attending private schools, although support for pre-K is also available.
For 2024, an eligible student’s household income would need to be $112,348 or less, plus $19,775 for each dependent in the household ($132,123 or less for one child). The funds help low and moderate income families afford quality Christian education, while also expanding opportunities to spread the Gospel to communities that may not have considered Christian schooling.
Each year the PA state legislature sets a cap on the total credits available through the program. For 2024, $470 million in credits were allocated. Once the credits are fully utilized, no further tax credits are available for that year.
Why Participate?
No one likes paying taxes, especially when those dollars may be used to support causes they don’t agree with. The Pennsylvania Educational Improvement Tax Credit offers a unique opportunity to redirect your tax dollars to directly support local Christian schools. Not only will you see the positive impact of your contributions in your own community, but you’ll also help advance the Gospel.
For Christians, this is a powerful way to make a meaningful difference in the lives of students and families at local Christian schools.
How Does It Work?
Here’s how the Pennsylvania Educational Improvement Tax Credit process works for an individual or family:
Step 1: Determine Your Expected Tax Liability
Each year you choose to participate, you’ll need to estimate your Pennsylvania income tax liability for that tax year. You can find this information on Form PA-40, Line 12 from your most recent tax return. While your taxes can vary annually, this figure helps estimate your potential credit for the current year. It’s strongly recommended to consult with a tax professional to ensure you accurately calculate your tax liability and understand the program’s impact on your taxes.
Step 2: Contact Your Local Christian School
After estimating your tax liability, reach out to the Christian school you’d like to support. Schools work with a Special Purpose Entity (SPE), which is a business entity created to obtain the EITC credits. Some schools may partner with multiple SPE’s, and they will guide you to the appropriate one to help complete the process.
Step 3: Sign and Make A Donation
The SPE will have you sign an agreement (called a joinder) for the amount you intend to donate. They will submit the paperwork to the Pennsylvania Department of Community & Economic Development, which manages the EITC credits. Once your credits are approved, the SPE will notify you, and you’ll have 60 days to make your donation by check to the SPE as a charitable donation.
During this period, it is important to remember that you’re still responsible for paying your estimated or payroll taxes.
Step 4: Wait For Your Tax Documents
In February of the year following your donation, you’ll receive two K-1 forms: one for the IRS and one for Pennsylvania.
These forms differ from typical tax documents. The Federal K-1 will list your donation, with 10% treated as a Federal charitable contribution, which appears as a deduction on Schedule A (if you itemize).
The PA K-1 will show your 90% Pennsylvania tax credit, which is entered on Schedule OC and appears on Line 23 of your PA-40.
Key Points to Note:
- K-1 Forms Can Be Complex: Filing a K-1 is more complicated than standard tax documents, so working with a tax professional in the first year is advisable to ensure everything is filed properly.
- Tax Credit vs. Tax Deduction:
- A tax credit directly reduces your tax owed, dollar for dollar.
- A tax deduction reduces your taxable income, which in turn lowers your taxes, but not on a dollar-for-dollar basis.
This program offers significant benefits, but it’s important to handle it carefully to maximize its impact.
Example
Let’s look at an example of how this would work for a person making $100,000 in PA taxable income:
| Maximum EITC Donation | $3,070 (PA tax rate of 3.07% x $100,000) |
| PA Tax Credit | $2,763 (90% of total donation, returned the following year) |
| Federal Tax Deduction | $307 (it will reduce your taxable income, but only if you itemize) |
| Net Cost to You | $307 or less |
In this scenario, you could donate $3,070 to a Christian school via the program, and it would cost you at most $307. If you itemize and are in the 22% tax bracket, your net cost would be $239 ($307 x 22%).
Important Details
The PA Educational Improvement Tax Credit is generally available to all individuals and businesses in Pennsylvania who pay state income tax. However, there are important details to be aware of (this is not an exhaustive list):
1. Individuals
- If you file a joint tax return, and only one spouse works, the program is based on your joint income.
- At least one spouse must work for a for-profit business. If the other spouse works for a non-profit, you are still eligible due to the joint tax return.
- Retirees are not eligible to participate unless they continue to work part-time or own a business.
2. Businesses
The business program is more complex, so it’s important to review the specifics. Here are some key details from the program’s website:
- Businesses can apply directly to the Pennsylvania Department of Community & Economic Development for their EITC credits, without needing to go through a Special Purpose Entity (SPE)
- The program runs from July 1 to June 30, so it is important to apply on July 1
- Tax credits can cover up to 75% of a business’s contribution, with a maximum credit of $750,000 per tax year
- If the business commits to the same contribution for two consecutive years, the tax credit increases to 90% of the contribution
- Eligible businesses must be authorized to operate in Pennsylvania and pay one or more of the following taxes:
- Personal Income Tax
- Capital Stock/Foreign Franchise Tax
- Corporate Net Income Tax
- Bank Shares Tax
- Title Insurance & Trust Company Shares Tax
- Insurance Premium Tax (excluding unauthorized, domestic/foreign marine)
- Mutual Thrift Tax
- Malt Beverage Tax
- Surplus Lines Tax
Businesses and individuals alike can benefit from participating in the EITC program while making a meaningful impact in their communities.
Important Considerations
1. Upfront Payment
Participating in the Educational Improvement Tax Credit Program requires you to make a donation to a Special Purpose Entity (SPE) in addition to paying your estimated or payroll taxes. The tax credits won’t be returned to you until after your Pennsylvania tax return has been processed. Typically, this happens by late spring or early summer of the following year, but it depends on when you file.
For first-time participants, this can present a financial hurdle. A helpful strategy is to make your donation to the SPE in the Fall of the tax year, minimizing the time your funds are tied up.
2. Estimating Your Tax Liability
While you can refer to your previous year’s tax return to estimate your current year’s liability, tax situations can change from year to year. It’s crucial to avoid applying for more credits than your taxable income can support, as the tax credit is non-refundable (which means it only offsets the taxes you owe and cannot be carried forward to future years). Therefore, requesting a credit that is less than what you are expecting to owe in taxes, can be beneficial.
3. Businesses Have A Two-Year Commitment
To maximize participation, businesses must commit to two consecutive years of contributions. As business conditions change, it is important for a business to carefully consider their commitment and ensure they can meet it if their circumstances change.
Final Thought
Participating in the PA Educational Improvement Tax Credit offers a wonderful way to support your local Christian school. Even if your own children are grown, you can still bless families whose children attend these schools. Your contribution also helps spread the Gospel to communities that might not have otherwise considered Christian education. With a relatively small investment, you can direct your PA tax dollars toward making an eternal impact.
