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September 15, 2015

Purchasing Missouri Tax Credits Can Help Reduce State Tax Liability

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.

View 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.

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