Don looked at his granddaughter, Lori. “What do taxes and death have in common?”
Pausing with a smile that only her grandfather could put on her face. Lori rolled her eyes. “What grandpa?” she asked. Her grandfather liked to ask those grandfather-like questions. They always had an air of joking wisdom. She loved her grandfather, and she was always willing to play along with these whims because she knew it was the way that he showed that he cared.
“They are inevitable!” he said with a triumphant I stumped you voice.
“Oh like Thanos,” she replied jokingly. Grandpa stared at her blankly. “It’s a movie reference”, she said. “Have you heard of the Marvel movies?”
“Like the comic book?”, he responded.
“Yep! Anyway, nevermind. Back to your question. I disagree. SOME taxes aren’t inevitable,” she said. She remembered a conversation she had with her friend, Angel, a financial planner.
Angel had told her about the idea of purchasing a tax credit. At first Lori had been confused. “Purchase a Tax Credit?” It sounded strange. When she hears “tax credit”, her mind went to saving money or getting a larger refund on her tax return.
“You qualify for a tax credit based on your life circumstances,” Lori asked her friend Angel, “you can’t BUY one, can you?”
“Well,” Angel responded, “You actually can purchase them. Normally tax credits are examples such as the Child Tax Credit, an Adoption Credit, or the American Opportunity Credit.”
“Yea, I’ve heard of those before, but how can you purchase tax credits?” asked Lori.
Angel said, “What happens is sometimes a company will receive tax credits from the state (or local) governments. This happens because these governments want to encourage companies to improve their business within their state or bring more business to their state. Maybe Virginia decides to focus on wind turbine technology and provides tax credits to incentivize wind turbine producers to set up production facilities in Virginia. The state might give this company (or companies) a tax credit, directly offsetting any tax liability owed to the state for a period of time.”
That sounds like a pretty good deal for the company.” said Lori.
Angle replied, “Yea it can be. But sometimes the tax credits aren’t as optimal as the company might want them to be. For example, let’s say Virginia gave a wind turbine production company $25 million in tax credits… But they can only apply $1 million in credits per year. Well that would take 25 years to use all $25 million of tax credits. Let’s say the company would have much preferred to save $20 million this year instead of $25 million over the next 25 years. If the company wants to raise extra money faster, they could “sell the credits”.”
“How does that work?” asked Lori.
“To sell credits, the company uses a dealer who might buy the credits for $0.83 on the dollar and then turn around and sell the credits to individual people for $0.85. This can work out for individual people like you and me as follows:
You make $100,000 a year. So you owe about $5,000 in taxes to Virginia this year.
You buy tax credits from this dealer for $0.85 on the dollar. So if you owe $5,000 you would buy $5,000 in credits but only pay $0.85 on the dollar ($4,250) from the dealer.
At year-end (when the State taxes are due), you apply the credits that you just bought and your $5,000 tax liability is covered.”
“So who can do this?” asked Lori.
Angel replied, “Literally anyone. You just have to find a dealer who is selling tax credits.”
“Holy cow!” Lori exclaimed, “I could save a lot of money on state and local taxes if I can purchase these tax credits!”
“That’s the idea!” replied Angel.
At Independent Financial Planning, if you have questions about purchasing tax credits, we can help you. Give us a call at 571-969-1459 or email us at ryan@ifpinvest.com. You can also visit our website at ifpinvest.com to learn more.
