With low-income housing deals, there are no restrictions on investors’ income. You can make $50,000, $100,000, $500,000, even $5 million per year and still cut your taxes with these credits. However, there are limits on the amount of these credits you can take.
For most investors, use of tax credits is limited by a $25,000 “deduction equivalent.” Say you’re in the 28 percent federal tax bracket: multiplying $25,000 by 28 percent equals $7,000, which is the maximum amount of tax credits you can take each year.
If the expected tax credit rate is 10 percent, you can invest up to $70,000 in a low-income housing partnership. That investment would provide you with an anticipated $7,000 worth of tax credits each year, for 10 years.
Low-income housing credits do not reduce an investor’s alternative minimum tax (AMT). Thus, if you expect to pay the AMT, year after year, you won’t receive tax breaks from these deals. Taxpayers who are not already in the AMT should calculate the amount of tax credits they can take each year, before the AMT kicks in, and invest accordingly.
Suppose you and your tax advisor calculate that reducing your federal tax bill by more than $5,000 would throw you into the AMT. You might invest $50,000, in order to receive $5,000 worth of tax credits per year.
