SLADE COLUMN: Some year-end state tax tips
If you're reading this, then the good news is that the Mayan prophecy about the world ending Dec. 21 was wrong. The bad news is, there's little time left to do some year-end tax planning that you may have been putting off in case the Mayans were right.
I'm going to focus on some South Carolina income tax credits and deductions that you're unlikely to read about in national publications. In some cases, you'll need to take action by Dec. 31 in order to claim these deductions or credits on your 2012 taxes.
In South Carolina, there's a very generous but little-used tax break for people with excessive homeowner's insurance costs, which is something lots of Lowcountry residents experience. The credit is based on taxable income and the amount paid for insurance during the tax year (for homeowner's insurance, flood insurance and any additional wind/hail premiums).
With the “excess insurance premium credit” the state will give homeowners a dollar-for-dollar tax credit worth up to $1,250 for the cost of insurance for their legal residence that exceeded 5 percent of their federal adjusted gross income. So, if the “adjusted gross income” listed on your federal income tax form is $50,000 and your homeowner's insurance cost more than $2,500, the state will give you a tax credit for the difference, up to $1,250.
For people who live on the coast, and particularly those in the “wind pool” insurance zone, this can be quite valuable. For those whose insurance bills aren't high enough to qualify for the credit, one option could be paying next year's premium early.
For example, let's say your annual homeowner's insurance bill is due in January or February. Maybe one year of insurance doesn't exceed 5 percent of your AGI, but two years of premiums would. If you paid your last bill in early 2012, and you pay your 2013 bill a bit early by the end of December, then both payments count for 2012.
The tax credit is claimed on S.C. Form TC44, the credit is subtracted from your South Carolina tax bill, and any unused amount of the credit can be carried forward for five years.
Higher education costs:
Like most states, South Carolina offers a federally sanctioned 529 Plan to help people save for higher education expenses. It's like a Roth IRA, but for college rather than retirement. What's special about South Carolina's plan, known as Future Scholar, is that contributions are deductible from state taxes, and there's no holding period.
What that means is, if you're going to be paying for qualified tuition, room and board, books or fees, and you first put that money into a Future Scholar account, it becomes a state tax deduction. For most people, that's like getting 7 percent of their money back.
The Future Scholar funds must be spent on qualified expenses, but the higher education institution does not have to be in South Carolina. Contributions claimed as 2012 tax deductions can be made until April 15.
For South Carolina residents investing in Future Scholar's “direct plan,” there is no fee to open or maintain an account, or to withdraw funds.
Future Scholar funds can be invested in stock and bond funds meant for long-term savings, but they also can be put in a stable money market fund or insured bank deposit fund. In addition to the state tax deduction for contributions, any earnings are exempt from state and federal income tax.
Qualified expenses “include tuition, fees, room, board, books, supplies and equipment required for enrollment in or attendance at ... 2-year and 4-year public and private universities, graduate and professional programs, and even some vocational programs.”
It's worth noting that generous federal tax credits are available for tuition, fees and course material expenses that were not paid for with 529 plan funds. The American Opportunity Credit, which was extended through 2012 as part of the federal stimulus effort, would give most taxpayers $2,500 back on the first $4,000 in qualified expenses, so it makes sense to exhaust that tax credit before using 529 funds.
Turning 70 soon?
People who establish special savings accounts to pay for catastrophe-related expenses such as insurance deductibles can get a South Carolina tax deduction. If the money is later used for a purpose other than catastrophe expenses, then it's taxed (to recapture the tax deduction) and there can be a 2.5 percent penalty.
However, when the owner of a catastrophe savings account turns 70, they can withdraw the money with no tax or penalty owed. So, residents in their late 60s who are looking for a state tax deduction might find it appealing to establish a federally insured catastrophe savings account, knowing that they can withdraw the money in a few years tax and penalty-free.
I've heard from people who had difficulty finding banks familiar with these accounts. Under state rules, the savings account must be designated as a “catastrophe savings account” and used only for those savings, and there are limits as to how much can be contributed.
Reach David Slade at 937-5552 or Twitter @DSladeNews.