Tax Credits
The American Opportunity Tax Credit (AOTC)
*is allowed up to a maximum of $2,500 per year for each eligible student*. *The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses* Qualified educational expenses are nondeductible tuition and academic fees (reduced by tax-free benefits, such as scholarships) incurred during a student's first four years of college. The expenses must relate to an academic period beginning in the current tax year, or the first three months of the next tax year. Course materials are also included. A qualifying student includes the taxpayer, spouse, or any dependent of the taxpayer enrolled at least half time in an institution of higher education. To be eligible, the student must be enrolled in a degree program. The credit is phased out ratably for single taxpayers with AGI in excess of $80,000 ($160,000 in the case of a joint return). The credit is phased out over a $10,000 range ($20,000 for joint return) and, thus, is completely gone when AGI reaches $90,000 ($180,000 joint return).
Child Credit
A $2,000 Child Credit is allowed for each qualifying child (as defined under the dependency rules) under the age of 17. The credit is phased out for married taxpayers with AGI in excess of $400,000 ($200,000 for unmarried). The credit is reduced $50 for each $1,000 (or portion) over the trigger AGI amount. These amounts are not indexed for inflation. Example: AGI of $423,500, 2 kids, married filing jointly ($423,500 − $400,000) / 1,000 = 23.5. So there are $24 units of $50 each (24 × $50 = $1,200). 4000 - 1200 = usable credit The additional child tax credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $2,500, max of $1,400 per child in 2018. For TP with 3 or more qualifying kids the credit is the greater of this amount or the excess of his Social Security taxes for the tax year over his Earned Income Credit for the year. Combat pay is treated as earned income for purposes of computing this refundable credit, even though combat pay is not taxable. Taxpayers electing to exclude foreign income or housing benefits are not eligible for the refundable portion of the credit.
Family Tax Credit
A $500 nonrefundable credit is allowed for dependents who are not "qualifying children" for purposes of the $2,000 child tax credit. Examples of individuals who may qualify taxpayers for a $500 credit are: A parent who is a qualifying relative Other dependents who are qualifying relatives Children who are older than 17 since they are not eligible to be claimed for the child tax credit Children less than age 24 who are full-time college students
Erroneously claimed child credit
A taxpayer who erroneously claims the child credit due to intentional disregard of the rules is ineligible to claim the credit for a period of two tax years. If the credit is claimed due to fraud the period is extended to 10 years.
Personal Credits
Child Tax Credit Family tax credit Saver's (IRA) Credit Education Tax Credits Dependent Care Adoption Expense Credit Elderly Credit Residential Energy Efficient Property Credit Foreign Tax Credit
Refundable Credits:
Earned Income Child Credit (partially refundable) American Opportunity/Hope Credit (partially refundable) Health Coverage Tax Credit
Credit for the Elderly and the Disabled
Eligible taxpayers are those who are either (1) 65 or older or (2) permanently and totally disabled. Permanent and total disability is the inability to engage in substantial gainful activity for a period that is expected to last for a continuous 12-month period. Married individuals must file a joint return to claim the credit unless they have not lived together at all during the year. Credit cannot be claimed if Form 1040A or 1040EZ is filed. Credit is 15% of an initial amount reduced by certain amounts excluded from gross income and AGI in excess of certain levels. The amount of credit is limited to the amount of tax liability. Initial amount varies with filing status. $5,000 for single or joint return where only one spouse is 65 or older $7,500 for joint return where both spouses are 65 or older $3,750 for married filing a separate return Limited to disability income for taxpayers under age 65 Reduced by annuities, pensions, Social Security, or disability income that is excluded from gross income. Also reduced by 50% of the excess of AGI over: $7,500 if single; $10,000 if joint return; $5,000 for married individual filing separate return.
Qualified adoption expenses
Expenses Include: Reasonable and necessary adoption fees, Court costs and attorney fees, Traveling expenses (including amounts spent for meals and lodging while away from home), and Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child. expenses incurred or paid during a tax year prior to the year in which the adoption is finalized may be claimed as a credit in the tax year following the year the expense was incurred. Adoption expenses incurred during the year the adoption becomes final or in the year following the finalization of the adoption are claimed in the year they were incurred. expenses incurred in carrying out a surrogate parenting arrangement or in adopting a spouse's child do not qualify for the credit.
Residential Energy Efficiency Property (REEP)
Individual taxpayers are allowed a credit for expenditures for installing certain energy-efficient property in the taxpayer's residence. The REEP credit allowed for a tax year equals the sum of: 30% of the qualified solar electric property expenditures; plus 30% of the qualified solar water heating property expenditures. New qualified plug-in electric drive motor vehicle credit (NQPEDMV credit) Must have battery capacity of at least 4 kilowatt-hours, and the base amount of the NQPEDMV credit is $2,500 per vehicle. Increases to $5,000 per vehicle based on a formula that increases the credit by $417 for every kilowatt-hour of battery capacity in excess of 5. The credit is allowed in the year the vehicle is placed in service. The vehicle must be new.
A "Saver's Credit"
Is allowed for voluntary contributions to IRA and qualified retirement accounts. The credit is a maximum of $1,000 (in addition to any exclusion or deduction that would otherwise apply) and is based upon IRA contributions (Roth or Traditional). The taxpayer must be 18 or older, not a full-time student, nor claimed as a dependent on another return, and cannot receive a distribution from the account.\ No credit is allowed for taxpayers with an AGI (2018) in excess of $63,000 ($47,250 for head of household and $31,500 for single taxpayers).
Lifetime Learning Credit
Is allowed up to a maximum of $2,000 per taxpayer per year. The credit is computed as 20% of $10,000 of qualified educational expenses incurred for the taxpayer, spouse, or dependent. Qualified educational expenses are nondeductible tuition and academic fees (reduced by tax-free benefits, such as scholarships) incurred by a taxpayer. Materials and textbooks are qualified expenses only if required to be purchased from the university (this differs from the AOTC). The expenses must be for post-secondary education, but need not relate to a degree program. Student does not need to be at least half-time for expenses to qualify. The Lifetime Learning Credit is phased out ratably for single taxpayers with an AGI for 2018 in excess of $57,000 ($114,000 in the case of a joint return) and is phased out over a $10,000 range ($20,000 for married-jointly).
Order of Credits
Personal (i.e., nonrefundable) credits are limited to gross tax, and there is no carryover of any excess. The general business credit is limited to a percentage of gross tax after personal credits, and any excess carries over (back one year and forward 20 years). Refundable credits (see list above) are applied last because these credits have no limit based upon tax (any excess, or a portion of the excess, is refunded to the taxpayer).
First-Time Homebuyers Credit
Recapture of previously taken credit is still applicable in 2018. For purchases after April 8, 2008, and before 2009 - credit must be paid back over 15 years on a straight line basis. If sold during the 15-year period, the unrecaptured credit must be added to the tax liability. no repayment if TP dies. no interest on credit.
Earned Income Credit (EIC)
Refundable credit for low-income taxpayers The credit percentage increases if the taxpayer maintains a home with qualifying children. The credit percentage is 7.65% for no qualifying children, 34% for one qualifying child, 40% for two qualifying children, and 45% for three or more qualifying children. The credit is disallowed if disqualified income, such as interest, dividends, tax exempt interest, and other investment income exceeds $3,500 (2018). Erroneous use of the credit due to intentional disregard for the rules makes the TP ineligible to claim the credit for a period of two tax years. If the credit is claimed due to fraud the period is extended to 10 years. Common source is earned income such as wages, salaries, tips or SE income. Combat income can qualify for this credit too. Taxable disability payments from the employer are earned income until TP is normal retirement age. A taxpayer cannot claim the credit if she files as married filing separately. The taxpayer must have been a U.S. citizen or resident alien for the entire tax year and must have a valid Social Security number to claim the credit. Info about qualifying kids is reported on Schedule EIC, amount of credit is reported on Page 2 of 1040. A paid preparer must also complete Form 8867 which provides a checklist to insure that the preparer met all due diligence requirements for taking the EIC on the return. There is a $510 penalty for each failure to meet these requirements.
General Business Credits
Research and Development Rehabilitation Miscellaneous
Adoption Credit
The adoption credit is allowed for adoption expenses. Reasonable expenses up to $13,840 (2018) associated with an adoption qualify for the credit. The credit is nonrefundable, which means it's limited to your tax liability for the year. However, any credit in excess of your tax liability may be carried forward for up to five years. A $13,840 (2018) adoption credit is available for children with special needs regardless of actual expenses. The credit begins to be phased out for taxpayers with an AGI (2018) in excess of $207,580, and is completely phased out for taxpayers with modified adjusted gross income of $247,580. The credit is limited to the regular tax liability, but any excess credit is carried forward for five years.
Dependent Care Credit
The dependent care credit is designed to provide a tax credit for a portion of the expenses incurred for caregiving while the taxpayer is employed. - To be eligible for the credit, a person needing care must live with the taxpayer for more than half the year. - Qualifying child automatically qualifies - Other dependents or a spouse will also qualify if they are incapable of self-care (physical or mental disability). - This individual must live in the same household as the taxpayer for more than half of the tax year. Expenditures for household services and care are required for the credit. The credit is calculated by multiplying the qualifying expenditures by the appropriate credit percentage. The credit percentage begins at 35% if an AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in an AGI above $15,000. The minimum dependent care credit is 20%. >Shortcut—Taxpayers with an AGI over $43,000 will receive the minimum dependent care credit of 20%. The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care) or, if lower, earned income (of the lesser-earning spouse if married).
The AOTC credit, the Lifetime Learning Credit,
and distributions from educational IRAs are mutually exclusive in that an educational expenditure can never simultaneously qualify for more than one benefit (i.e., no "double dipping"). The AOTC applies per student ($2,500 per student), whereas the Lifetime Learning Credit applies per tax return (maximum $2,000 credit per year). For the AOTC and the Lifetime Learning Credit, a taxpayer must have received Form 1098-T from the educational institution to claim the credit.
