Tax Time – Arizona Tax Credit

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‘Tis the time of year for thinking about and planning for tax time. And as I’m planning for putting together our taxes, I’ve prepared by making a tax-credit eligible donation to my kids’ school.

What’s a tax credit?

Not all states offer tax credits. This is a dollar-for-dollar “credit” toward the money you owe the state in taxes. Compare this to a tax deduction, which lowers the amount you’ll pay in taxes by lowering your taxable income. But due to the way a tax credit works, it’s much more advantageous financially. Imagine if you had a $400 tax credit. It means your state tax liability would be reduced by exactly $400. In comparison, if you had a $400 deduction, it would reduce your taxable income by $400. This would likely have some minimal impact on lowering your taxes, but it would not be as advantageous as a dollar-for-dollar credit.

How do I qualify for a tax credit?

From what I understand, different states offer tax credits for different things. Some offer child tax credits similar to what is offered federally. But at least in Arizona, you can also earn a tax credit by donating to a variety of non-profit organizations, including K-12 schools. I love this option because it means I can directly contribute to my kids’ school and that money is deducted (dollar-for-dollar!) from what I owe in state taxes. There are some rules for how the money must be earmarked and spent. But, in general, the money can be used to benefit extra-curricular opportunities including field trips! My kids’ school often asks parents to invest this way, and it helps the kids have great experiences outside the classroom.

Contribution Limits

It’s important to note that there are contribution limits in place. You can’t just donate thousands of dollars and receive thousands back in refunds for donating over-and-above your state tax liability. But I love that I can support local organizations (like schools, foster care organizations, and more) and it doesn’t cost me a penny extra. It’s money I would be paying to the state for taxes anyway!

Types of tax credits

The only tax credits my family has historically been able to take advantage of are through our donations to local schools and other charitable organizations. However, Arizona allows a variety of tax credits, including those for small business owners and those who invest in renewable energy. When we bought our house, it already had solar installed on it (we just inherited it). The initial owners, however, were able to claim the investment in solar on their taxes and receive the tax credit for installation. This is an incentive Arizona offers to promote renewable energy sources. Different states likely offer different types of credits, so you’ll have to do a little research to figure out if you have tax credits for which you might qualify.

Final Thoughts

I’m trying to get an early start on taxes this year so it’s not hanging over my head. Although I never really enjoy the process, I think we’ve gotten pretty good at reducing our tax liability and coming pretty close to breaking-even (or receiving a small refund) at the end of the year. This is exactly where I want to be! I used to enjoy receiving BIG refunds when I was a teenager and young adult. But now I realize that just means I’d been overpaying the government all year long an interest-free loan! I’d rather just break even and have no refund, which means I’ve been in more control of my money throughout the year. Here’s to hoping this year works out the same! Fingers crossed!

Do you live in a state that offers tax credits?

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