Exploring the Advantages of Opportunity Scholarship Tax Credits

On May 30, 2023, Nebraska Governor Jim Pillen signed a law adopting the Opportunity Scholarships Act for corporate income, individual income, and trust income tax purposes. Individuals, corporations, estates, trusts, LLCs, and S corps can receive nonrefundable tax credits for donating to scholarship-granting organizations through the program. These organizations, in turn, distribute scholarships to eligible students, allowing them to enroll in private schools that align with their educational needs and goals.

Tax Benefits

One of the Opportunity Scholarship Tax Credit program’s key advantages is its tax benefits to individuals and corporations. By donating to scholarship-granting organizations, taxpayers can claim nonrefundable income tax credits of up to 50% of their state income tax liability. This means that eligible donors can reduce their tax liability by a significant amount, making it a win-win situation for both the donor and the student receiving the scholarship. For example, if an individual has a state tax liability of $100,000 and donates $50,000 to a scholarship granting organization, they will receive a $50,000 tax credit, reducing their tax liability to $50,000.

However, if that same individual donates $75,000, they will only receive a $50,000 credit because it is limited to 50% of their state income tax liability. Since the credit is nonrefundable, it only reduces their liability. The taxpayer will not receive a refund as a result of the credit.

Other notable details of the credit include:

• It is effective for tax years beginning on or after January 1, 2024.
• The credit is the lesser of:
• Contributions made during the tax year
• 50% of the taxpayer's income tax liability
• $100,000 ($1 million for estates or trusts)
• Credits earned by a pass-through entity must be redistributed to the owners based on their distributive percentage of income/loss.
• Unused credit can be carried forward for five years.
• A taxpayer cannot claim the credit if they claimed the donation as a charitable donation for federal income tax purposes.
• An organization must file Form NSGO, which is an application to become a certified Nebraska Scholarship-Granting Organization, with the Nebraska Department of Revenue.
• To qualify, an organization must be exempt from federal income tax under section 501(c)(3).
• The scholarship-granting organization will be responsible for requesting tax credits from the Department of Revenue on behalf of donors.
• The department may give $25 million in credits in 2024, 2025, and 2026, with a chance to increase by 25% each year if at least 90% of the credits are used, up to a total of $100 million.
• Donors must make the contribution within 31-60 days after notifying the scholarship-granting organization of their intent to donate.

Priority for Lower-Income Students

The Opportunity Scholarship Tax Credit program prioritizes lower-income students, ensuring that those who may not have the financial means to attend private schools have the opportunity to do so. Scholarship eligibility is based on the federal poverty level, prioritizing students from families below that threshold. This targeted approach ensures that the program benefits those who need it the most.

Empowering Families and Students

Not all students thrive in a traditional public school setting, and this program acknowledges that by providing an alternative option. By allowing families to select an alternative school, students can benefit from a tailored educational experience that aligns with their learning styles, interests, and goals.

Current Petitions

As of this writing, the Opportunity Scholarship Tax Credit in Nebraska has sparked a heated debate between supporters and opponents. The petition group Support Our Schools Nebraska worked to place a referendum to repeal the Act on the 2024 ballot.

Critics argue that this credit will primarily benefit the wealthy and deplete funding for public education, while supporters maintain that public schools will not lose money. Both sides are well-funded, with Support Our Schools receiving about $1.3 million and Keep Kids First, an organization urging Nebraskans not to sign the petition, has collected about $750,000 from national organizations. Supporters of the tax credit emphasize parental choice, while opponents express concerns about the potential negative impact on public schools and teacher shortages.

Support Our Schools successfully garnered 117,000 signatures, surpassing its initial goal of 90,000. This suggests growing interest and debate surrounding the law’s potential consequences. If you have questions about the impact of this credit on your tax return, please contact us.