With the 2026 tax landscape shifting after the Tax Cuts and Jobs Act (TCJA) sunset, families must evaluate whether to prioritize K-12 scholarship tax credits or charitable contribution deductions. Understanding the interaction of credits, floors, and AGI limits is key to maximizing savings.
📌 Background on Charitable Contributions
Under current law, individuals who itemize can deduct charitable contributions up to a percentage of their Adjusted Gross Income (AGI). After 2026, the 60% AGI limit for cash contributions to public charities may revert to lower thresholds, while non-cash contributions retain a 30% AGI limit.
Contributions supporting K-12 private school scholarships often qualify as charitable deductions. However, many states also provide dollar-for-dollar tax credits for these contributions, raising coordination challenges.
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💡 K-12 Scholarship Credits: Federal vs. State Impact
Many states offer education tax credits for contributions to scholarship-granting organizations (SGOs). For example, a $1,000 donation might yield a $1,000 state tax credit, effectively reducing your state liability to zero for that amount.
The IRS has ruled, however, that if you receive a state tax credit for your gift, the portion covered by the credit is not deductible as a federal charitable contribution. Only the “net” unreimbursed portion may qualify.
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⚖️ The Floor: 2% and Itemization Thresholds
After 2026, the standard deduction is expected to shrink, meaning more taxpayers will return to itemizing deductions. This raises the value of charitable contributions but also revives floors and phaseouts:
- AGI Floors: Miscellaneous itemized deductions may again require exceeding a 2% AGI floor to count.
- Pease Limitations: For high earners, itemized deductions (including charitable) may be phased out.
Taxpayers coordinating credits with deductions must ensure they clear AGI floors while avoiding reduced benefits at higher income levels.
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📊 Example Scenarios
| Scenario | State Credit | Federal Deduction | Net Benefit |
|---|---|---|---|
| $1,000 gift, 100% state credit | $1,000 | $0 deductible | State benefit only |
| $1,000 gift, 50% state credit | $500 | $500 deductible | Mixed federal + state benefit |
| $1,000 gift, no state credit | $0 | $1,000 deductible | Federal benefit only |
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🛠️ Planning Strategies for 2026
- Compare credit vs. deduction values: a dollar-for-dollar credit often beats a deduction.
- Stack charitable giving in years with higher AGI to avoid phaseouts.
- Prioritize credits for K-12 scholarship contributions but account for lost federal deduction.
- Use donor-advised funds to time deductions when AGI floors are favorable.
- Consider state pass-through entity (PTE) taxes as an alternative SALT workaround to enhance deductibility.
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