The annual tax preparation season has begun and with it come many questions about what can be deducted and what can be used as a tax credit. Although you should consider these questions throughout the year so you’ll be better prepared to submit your annual tax return each spring, it is not too late for some Arizona tax credits. Here’s what you need to know to optimize your state tax return.

Tax Credits and Deductions

There is a difference between a tax credit and a tax deduction and it’s important to understand each one fully. Both the credit and the deduction can reduce your final tax bill. However, a tax deduction will reduce the total amount of income that is subject to taxes. Think of it as a deduction from your income, which results in a deduction in the total tax due.

A tax credit, on the other hand, is applied directly to the amount of taxes you owe. So, if you owe $5,000 in taxes and you have a $500 tax credit, your total taxes after the credit is applied will be $4,500. You cannot apply more in tax credits than you actually owe in taxes. However, with some exceptions, you may be able to carry your unused credit forward for five years.

Types of Arizona Tax Credits

In the state of Arizona, you can make a donation to charities and schools and claim the donation as a tax credit on your 2020 tax return. There are several categories for these donations, including Qualifying Charitable Organizations (QCOs) and Qualifying Foster Care Charitable Organizations (QFCCO).

When contributing to a QCO, use Form 321 to claim a maximum credit of $800 if married filing jointly and $400 for single, heads of household, and married filing separately. This tax credit is available for contributions to Qualifying Charitable Organizations that provide immediate basic needs to residents of Arizona who receive temporary assistance for needy families (TANF) benefits, are low income residents of Arizona, or are individuals who have a chronic illness or physical disability.

To claim a tax credit for contributing to a QFCCO, use Form 352. The maximum credit allowed for this contribution is $1,000 for people who are married filing jointly, and $500 for those who are single, heads of household, and married filing separately. The credit can be taken for contributions to Qualifying Foster Care Charitable Organizations that provide immediate basic needs to residents of Arizona who receive temporary assistance for needy families (TANF) benefits, are low income residents of Arizona, or are individuals who have a chronic illness or physical disability, and organizations that provide immediate basic needs to at least 200 qualifying individuals in the foster care system.

Additionally, a tax credit can be claimed for a contribution to an Arizona public school, for the support of eligible activities or programs. Use Form 322 for this credit, which has as its maximum $400 for married filing jointly and $200 for single, heads of household, and married filing separately. You will also have to report the school’s County Code, Type Code, and District Code & Site Number (CTDS) number on Form 322 to claim this tax credit.

April 15 Deadline

Most categories of contributions allow you to make your donation before April 15, 2021, and still qualify for the Arizona tax credit. If you make the donation between January 1 and April 15, 2021, you can claim the credit on either your 2020 or your 2021 tax return. So, it is not too late to make contributions to qualifying charities and include the contribution as an Arizona tax credit for last year. Federal deductions, however, are only eligible to be claimed in the year in which the contribution was made. Keep good records to determine which contributions can be claimed this year on your Arizona tax forms and which should be claimed next year on your federal forms.

CLEAR VIEW BUSINESS SOLUTIONS CAN HELP

Tax time can be confusing. The experts at Clear View can help ensure that you are maximizing your available credits and deductions and minimizing your tax payment. We work with you throughout the year to help you be better prepared to make sound financial decisions and to plan for your success. The past year, in particular, has been a challenge for many small business owners and solo-preneurs and we are here to guide you with professional business advisory services, tax planning and preparation, accounting, and bookkeeping. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.