Virginia Tax Credits

Virginia Tax Credits - What you need to know

The end of 2020 is finally here and that means it is time to start tax planning. You may now be realizing your Virginia tax liability is going to be more than you thought. Or maybe you are just looking for ways to pay less in taxes. Well look no further: Virginia land preservation tax credits are a safe and easy way to save on your tax bill.

What are Virginia Land Preservation Credits?

Virginia land preservation tax credits come from companies and individuals that have put easements on their land.  Rather than pay them in cash, the state grants tax credits in exchange for the conservation of land.  The credit is limited to $20,000 per person per year. Since it is capped, recipients are able to sell any excess credit to the general public at a discount.

The land preservation credits are generally sold for between 85-89% of their value. The discount will depend on how motivated the seller is and the time of yearGenerally, the earlier in the year it is, the better deal you will find. The current rate that we have seen is 89%.  

Note – if you would like to utilize the credits on your 2020 tax return, you must purchase the credits before end of the year.

Tax Consequences

A tax credit reduces your tax liability dollar-for-dollar.  In other words, you directly reduce your tax liability by the face value of the credit. 

However, you must recognize a short-term capital gain on your federal return (not on your Virginia return). The amount of the gain is the difference between the face value of the credit and what you paid for it.  But – you can also include the value of the credit as an itemized deduction (i.e. write-off) on Schedule A. You wouldn’t get this benefit if you take the standard deduction, however.

Any withholding or estimated payments you made during the year may be refunded to you if the credit purchased covers your entire tax liability. The credit is nonrefundable, so any excess credit will be carried forward to future tax years. Here’s another idea: if you didn’t make any withholding or estimated payments during the year, this could be an efficient way to pay your tax and avoid any late payment penalties.  

Example

Here’s an example to illustrate the benefits. Assume $1,000 tax credit is purchased for $890. The tax consequences would be as follows:

  • $1,000 payment credited to your Virginia taxes, while only actually paying $890 out of pocket to buy the credit
  • Short-term capital gain $110 on your federal return, taxed at ordinary income rates (the same as salary & wages)
  • Schedule A itemized deduction of $1,000 on your federal return (only if you itemize deductions)
  • If you owe less than $1,000 in Virginia income tax, your tax bill is wiped to zero. The excess credit is carried forward to future tax years until used up.
    • Ex: if you owed $700, then $700 of the credit is applied to zero-out your current year tax bill. The remaining $300 can be used in 2021.
The Bottom Line

Buying Virginia land preservation tax credits can be a quick and easy way to reduce your tax bill. Time is running out to take advantage of this strategy in 2020 (you have until 12/31 to purchase a credit), but be sure to keep this strategy in your back pocket as you plan for 2021 taxes. 

Please reach out to a Taylor Hoffman advisor if you would like assistance with year-end financial planning or learning more on how to purchase a Virginia tax credit.

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