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BUSINESSDelve into details before you buy state tax creditsPractice Pointers. By Cathy B. Goldsticker, AMNews contributor. Jan. 24, 2005. Question: I know of several colleagues who are purchasing state tax credits to satisfy their 2004 state individual income tax obligation. Is this a good idea? Are there any traps I need to worry about? Answer: Each state has different tax credit programs with different rules. The concept behind tax credits generally is to provide a financial incentive, through tax credits, to encourage cash investments for certain social or economic activities. If your state allows the tax credits they issue to be transferred without severe penalties, a tax market is created for buying and selling. The Internal Revenue Service has several tax credit programs, but most of its tax credits cannot be transferred without causing significant financial penalties to the seller. Consequently, you don't hear much about federal tax credits being sold in an open market. Typically tax credits are purchased from the original holder -- who made the desired expenditure to earn the tax credit -- by a bank, broker or other service organization for cents on the dollar. Then, the broker/purchaser resells these credits, at a profit but below their face value, to someone who is looking for a method to satisfy a state tax obligation for an amount less than was originally owed. Tax credits can be used for many different types of taxes, such as individual income tax, corporation income tax and franchise tax. Sometimes you may be able to negotiate the price, depending on the supply of tax credits, and when you plan to purchase them. If you purchase them at a popular time such as December or April, you most likely will pay more for them than making your purchase at an off-tax season time, such as in the summer months. [...]Full text of AMNews content is available to AMA members and paid subscribers.
Copyright 2005 American Medical Association. All rights reserved.
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