New tax savings program starts July 1
A very exciting tax savings program is about to roll out on July 1st and I think now is good time to refresh on the state of Indiana's great tax credit programs.
First, lets go over the difference between a tax credit and a tax deduction. A tax deduction is income that is excluded from being taxed. Common tax deductions are state and local taxes, mortgage interest and charitable contributions. Most of the time, in order to benefit from a tax deduction, the tax payer must "itemize" their deductions, instead of using the standard deduction.
In 2024 for a married couple filing jointly, the standard deduction for federal and state income tax is $29,200, so in my experience many tax payers do not have enough in itemized deductions to exceed the amount of the standard deduction. So, long story short, many people are not getting an additional tax benefit for expenses like charitable contributions and mortgage interest.
If, however, a tax payer does have sufficient deductions to exceed the standard deduction, the amount of the deduction is excluded from income taxes. For example, a $10,000 mortgage interest deduction for a family with $150,000 in income, choosing to itemize, would reduce federal and state taxes income tax due by about $1,800.
A tax credit works differently and in my opinion is much more attractive. A tax credit directly reduces the amount of tax owed by the tax payer. Common tax credits are child and dependent care tax credits, the earned income tax credit, the American Opportunity tax credit for education, and in the state of Indiana the 529 contribution tax credit for amounts contributed to the Indiana College Choice 529 plan.
In the scenario, let's assume an Indiana family with two children contributes $4,000 to an Indiana 529 plan and pays $6,000 a year in child care costs. In this scenario, the same $10,000 in expenses, only this time eligible for tax credits, reduces federal and state income taxes by $7,000. A much better outcome.
Bottom line, tax credits are very attractive planning tools. So how do we get more? Well, fortunately the state of Indiana offers some great options, and one new one rolling out on July 1st. Let's go over some of these great programs.
In my opinion, Indiana has very attractive tax rules regarding contributions to its Indiana College Choice 529 plan. For Indiana residents, the state offers a tax credit of 20% for contributions to this plan, for a maximum credit of $1,500 for a $7,500 contribution. This tax credit is available to Indiana tax payers, but the beneficiary of the 529 does not need to be an Indiana student or attend and Indiana school. The tax payer also does not need to be the owner of the 529 plan, so grandparents can contribute to an account owned by parents and still claim the credit. I am not aware of a more generous state tax credit option for any other state's 529 plan. And in 2024, a credit is also available for families contributing to the InvestAble plan which benefits individual with disabilities. Kudos to Indiana.
Another attractive Indiana state tax credit program is the NAP credit. The NAP credit is designed to benefit local non-profit organizations working to improve our communities. This program provides a 50% state tax credit for donations made to organizations participating in the program. In addition, the contribution to the non-profit may also be eligible for deduction on the tax payer's Federal tax taxes. So, with the NAP program a donation of $1,000, will reduce Indiana state taxes due by $500 plus potential Federal savings. What a great program. Some of the local organization participating in this program in 2024 are Boys and Girls Club, Caring Place, Dunebrook Hospice, Healthlinc, Opportunity Enterprises, Habitat for Humanity, and Planting Possibilities. Contact these organizations to learn more.
A tax credit program I intend to explore personally this year is the Indiana Scholarship Granting Organization (SGO) tax credit. This credit functions the same as the NAP credit with a 50% tax credit for contributions to and SGO that provides educational scholarships to eligible Indiana students. The Legacy Foundation is a local SGO and a number of private schools in Lake and Porter county have SGO partners as well. More information can be found on the Indiana Department of Education website.
The newest Indiana state tax credit program is the Affordable Homeownership Tax Credit. This tax credit will also function similarly to the NAP and SGO credit, providing a 50% credit for contributions to be used to reduce Indiana income taxes due. The purpose of this credit is help fund local affordable housing projects that are so vital to our local communities. This tax credit is available locally through Habitat for Humanity, so once again contact this organization to learn more.
We all appreciate saving money on taxes. With a little bit of planning and education, the state on Indiana provides some great option. Consult your tax advisor to learn more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
