Alabama Enacts CHOOSE Act Income Tax Credit Program for Qualifying Educational Expenses

By Denis Del Bene

Alabama has enacted legislation establishing the Creating Hope and Opportunity for Our Students’ Education (CHOOSE) Tax Credit program which will provide a refundable income tax credit to parents of eligible students to offset the cost of qualifying educational expenses. The legislation directs the Department of Revenue to establish education savings accounts (ESAs) in which the credit funds will be deposited by the Department for the parent of a participating student to pay qualifying expenses to an education service provider. (L. 2024, H129 (Act 21), effective 03/07/2024.)

CHOOSE Act tax credit.

For the years beginning on January 1, 2025, and January 1, 2026, the credit will be available to the parent of an eligible student whose family had an adjusted gross income not exceeding 300% of the federal poverty level for the preceding tax year. For the years beginning on or after January 1, 2027, the credit will be available to any parent of an eligible student.

The Department must reserve the first 500 tax credits for parents of an eligible student who is a special-needs student.

Credit amount.

For participating students enrolled in a participating school, the annual amount of the credit will be the lesser of $7,000 or the actual cost of the qualifying educational expenses. For participating students not enrolled in a participating school, the annual amount of the credit will be the lesser of $2,000 or the actual cost of the qualifying educational expenses, provided that the aggregate amount of all credits awarded to a parent for such students cannot exceed $4,000.

Credit amounts received will not constitute taxable income to the parent or to the participating student and the refundable income tax credit will not be subject to offset or debt collection against any liability.

Definitions.

For purposes of the credit, an “eligible student” is a child aged five to 19 years who resides in Alabama and has not graduated high school, or a child aged five to 21 years who resides in Alabama and qualifies for services under the Individuals with Disabilities Education Act (IDEA) or Section 504 of the Rehabilitation Act of 1973. The term does not include: (1) a student receiving scholarship funds or a tax credit under the Alabama Accountability Act; (2) a child who is enrolled in a private school that is not a participating school; or (3) a child who is not lawfully present in the United States.

“Qualifying educational expenses” mean expenses incurred by a parent of an eligible student in one or more of the following categories: (1) tuition and fees at a participating school; (2) textbooks; (3) fees for after-school or summer education programs provided by a participating school; (4) private tutoring; (5) curricula or instructional materials; (6) tuition and fees for nonpublic online learning programs; (7) educational software and applications; (8) fees for standardized and nationally recognized assessments, including college admissions tests and advanced placement examinations and related preparatory courses; (9) education services for students with disabilities from a licensed or accredited practitioner or education service provider; and (10) contracted services provided by a public school district including specific classroom instruction.

Credit administration.

With respect to the parents of eligible students, the Department will administer the program by:

1. Creating and disseminating a standard application form for parents seeking to participate in the program.
2. Establishing and publicizing a deadline by which application forms must be submitted to the Department.
3. Receiving and approving applications for parents of eligible students to whom the Department has awarded a tax credit and who meet the program requirements.
4. Creating an educational savings account (ESA) for the parent of the participating student and depositing the amount of any tax credits awarded under the program.
5. Establishing a system by which the parent of a participating student can make periodic payments from an ESA to an education service provider or participating school including by electronic or online fund transfer.
6. Providing to parents of participating students a written explanation of qualifying expenses, their responsibilities under the program, the duties and responsibilities of the Department, and provisions regarding the misuse of program funds.
7. At the expiration of an academic year, remitting any unused ESA funds to the CHOOSE Act Fund (Fund).

With respect to participating schools and education service providers, the Department will administer the program by:

(1) Creating and disseminating a standard application form for a person or entity to establish eligibility as a participating school or education service provider.

(2) Establishing and publicizing a deadline by which application forms must be submitted to the Department.

(3) Receiving and approving applications for participating schools and education service providers that meet program requirements.

(4) Providing to education service providers and participating schools a written explanation of qualifying expenses, their responsibilities under the program, and the duties and responsibilities of the Department.

CHOOSE Act Fund.

The legislation creates the Fund in the state treasury for the purpose of providing funding for the tax credits. The legislature will appropriate not less than $100 million to the Fund beginning with appropriations made for the fiscal year ending September 30, 2026, and continuing annually thereafter.

Program information.

The Department will make available on its website aggregate information regarding the number and amount of credits claimed each tax year. The Department will also maintain a list of approved participating schools and education service providers on its website.