06.04.2024 News Doerner

ALERT: Oklahoma Parental Choice Tax Credit Update

When the Oklahoma Parental Choice Tax Credit Program was enacted in 2023, it offered school-choice opportunities to all families. The Program allows Oklahoma taxpayers a tax credit of $5,000 – $7,500 per school year for each child attending an accredited Oklahoma private school. Funds are limited and are offered on a “first come, first serve” basis with priority given to households with taxable incomes of less than $150,000. Funding for the 2024-2025 school year was set at $150 million. All funds were allocated within 30 days of opening the application process.

On May 6, 2024, the law was amended to increase funding and provide that the credit cannot be reduced by other amounts owed by the taxpayer to the State of Oklahoma. For the 2025-2026 school year, the funding will be increased to $250 million. However, this may not be enough to provide for all applicants. Priority will be given to households with incomes of less than $150,000. An important caveat is that funding is limited, and it may be discontinued in the future.

Taxpayers must affirmatively apply for the program and, if approved, check payments are divided into two equal parts mailed directly to the school of attendance. The taxpayers must then go in person to the school to endorse the checks. If the school has already been paid, then payment is refunded by the school to the taxpayer. These payments may not be deducted from any amounts due by the taxpayer to the State for Oklahoma income taxes.

The law does not specifically provide for situations involving divorced parents, however, the income of all individuals providing financial support for the child or children attending the private school is included when determining household income, even if they are not living in the same house. Information must be provided on the application that will allow Oklahoma to access all responsible individuals’ income tax information.

The Oklahoma Tax Commission administers the check payments. Because of the changes recently made, the 2025-2026 year application dates are not yet finalized. The Oklahoma Tax Commission website includes information on the tax credit and available funds.

While categorized as a refundable tax credit, the Oklahoma Parental Choice tax credit is most similar to a school voucher or grant. The Internal Revenue Service has yet to rule on the exact character of the payment. If it is determined to be in the nature of a qualified scholarship under IRC §117(a) and (c), then it is non-taxable for both Federal and State purposes. However, the Internal Revenue Service has yet to provide any guidance on this issue meaning payments made under this program might ultimately be deemed to be taxable income to the applicant. Care should be given, therefore when applying for and drafting any parental agreements regarding utilization of this Program.

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