Last year people who took our advice saved literally thousands of dollars on their Virginia taxes. A dollar saved on your taxes is more valuable than a taxable dollar earned in income. The extra dollar in income still requires taxes to be paid. So if you pay more than average Virginia income taxes, take the time to consider this advice.
In the past, some readers were confused, believing they needed to have land put into easement in order to benefit from this technique. There are no such requirements. Every Virginia taxpayer can profit.
The process begins with someone else donating a conservation easement against their land. They donate their development rights to a conservation nonprofit. And in return they not only get a tax write-off, but they also receive transferable tax credits.
Here is where you come in. You can buy those tax credits for as low as 80 cents on the dollar. And you can use each credit to pay a dollar’s worth of your Virginia tax bill. That means if your tax bill is $5,000, you can buy $5,000 worth of credits for about $4,000.
Saving $1,000 just for filling out some paperwork and reporting the credits properly on your income tax return is time and trouble well spent. But if you are a small business owner whose Virginia tax bill is normally $50,000, you can’t afford not to take advantage of such an offer. In that case you can buy $50,000 worth of tax credits for $40,000 and save $10,000 for the same time and trouble.
Advocates suggest that conservation easements do permanently what taxation based on land use assessment tries and fails to accomplish every year. These permanent conservation easements keep land open and undeveloped in perpetuity. In Virginia, currently 6% of the land not owned by the federal government is subject to permanent conservation easements.
The tax savings may sound too good to be true or even illegal. But the commonwealth of Virginia budgets up to $100 million for qualified land preservation tax credits. Politics and environmentalism aside, you should take advantage of buying these credits no matter which way you would vote on the public policy issue. We shouldn’t look for morality in the tax code.
Brokers do suggest you have at least a $3,000 tax liability before you decide to take advantage of these credits, which would save you $600. The risks are small but do exist. Good brokers weed out questionable credits. They also ensure that sellers provide legal guarantees to protect buyers. In the worst case scenario, the credits are disallowed, the seller refunds your purchase of the credits and you have to pay the full tax you owed originally.
You must purchase the credits before the end of the year to use them to pay your tax in April. Each taxpayer can use up to $50,000 of credits per year, so a husband and wife could each buy their own and use $100,000. Unused credits can be carried forward for up to 10 years.
If you have already had Virginia tax withheld from your income, you will receive money back when you file your tax return in April. If you purchase enough credits to cover your tax liability, you can stop having Virginia tax withheld completely.
Tax credits this year are scarcer than normal. Legislation has changed and allowed credit sellers to receive long term capital gains treatment if they hold credits over a year. Therefore many of the credits generated this year are being held for sale next year. Only credits generated in prior years are readily for sale this year, reducing the supply of credits.
Proactive certified public accountants or financial planners who review your finances and suggest ways like these to save thousands of dollars are worth their weight in tax credits. Ask your advisor about using this technique to save you money. As it gets later in the year, credits become more expensive, so we recommend purchasing credits during the summer months.