Missouri taxpayers may wonder what options they have to help reduce their state tax liability. One option for many taxpayers is to purchase Missouri tax credits.
Once purchased, a Missouri tax credit is applied dollar-for-dollar as a reduction to the Missouri tax liability on Missouri’s tax return, as opposed to a tax deduction, which reduces taxable income resulting in a decrease in tax liability equal to the percentage of a taxpayer’s marginal tax bracket. A Missouri tax credit may be purchased for less than a dollar. They are generally purchased from a bank specializing in the sale of Missouri tax credits. If a taxpayer earned Missouri tax credits from the state, such as for completing a Missouri historic rehabilitation project, they may sell any excess credits to the bank. See the following example:
Assume a taxpayer has Missouri taxable income of $500,000. Their income tax liability is approximately $30,000 (6% of taxable income). The taxpayer purchases the credits for $.94 per credit dollar which equates to $28,200. The taxpayer reduces their Missouri tax liability to zero on the current year tax return using the $30,000 in credits and will recognize a short-term capital gain of $1,800 taxed at the ordinary tax rate. So the benefit is that a taxpayer can spend $28,200 on credits and recognize $713 in tax on the capital gain if they are in the highest tax bracket of 39.6%. This covers the $30,000 MO tax liability at a cost of only $28,913 ($28,200 + $713). This leaves the taxpayer with a $1,087 benefit ($30,000 – $28,913).
In addition to the credits being claimed on the state tax return, the total $30,000 (in the example above) can be claimed as a state tax deduction on the federal income tax return in the year the purchase was made.
Another option for a taxpayer who wishes to obtain Missouri tax credits is to donate to an organization that offers tax credits in return for contributions made. Generally, a Missouri tax credit received from charitable contributions is equal to 50% of the donation made. This is in addition to receiving a federal tax deduction for the contribution. There are a number of programs from which tax credits may be purchased.
Click here for a listing of the charitable programs with Missouri tax credits available and relevant information pertaining to each.
For more information on Missouri tax credit options, contact an Anders tax advisor.All Insights