There are a number of tax credits that are available to individual taxpayers and small businesses.  Unlike tax deductions which reduce your taxable income, tax credits reduce the actual tax dollar for dollar.  This section includes the more commonly available tax credits.

Home Energy Credits

Tax Credit for Residential Energy Improvements - A credit for energy-savings improvements made to a taxpayer’s principal residence located in the United States is available through 2016. The credit generally equals 10% of a homeowner’s cost of eligible energy-saving improvements, up to a maximum lifetime tax credit of $500.  Thus for the current year, if the total of nonbusiness energy property credits taken in prior years is more than $500, no credit is allowed in the current year.  Some of the energy property categories have lower limits, such as $200 for exterior windows and skylights.

The cost of certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass all qualify, along with labor costs for installing these items. The cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation, and certain roofs also qualify for the credit; however, the cost of installing, including onsite preparation, assembly, or original installation of the component is not included.

The improvement’s original use must commence with the taxpayer, and the improvement must reasonably be expected to remain in use for at least five years. Credit generally applies to the following:  
  • Qualified advanced main air circulating fan (used in a natural gas, propane, or oil furnace);
  • Qualified energy-efficient heat pumps;
  • Qualified energy-efficient water heaters;
  • Qualified energy-efficient central air conditioners;
  • Qualifying insulation;
  • Qualified exterior windows, including skylights;
  • Qualified exterior doors;
  • Qualified metal roofs coated with heat-reduction pigments; and
  • Qualified asphalt roofing with appropriate cooling granules.

Credit limitations – The credit is limited to the amount of income tax less certain other personal credits. If the residential energy improvement credit is greater than the amount the taxpayer’s tax, the excess is lost; it cannot be carried over to another year.

Tax Credit for Residential Energy Efficient Property (Solar credit)

This credit is available for years noted below. The installation must be on the taxpayer’s main or second home located in the United States. Although this credit is most well known for the tax credit it provides for solar installations, it also provides credit for the costs of fuel cell equipment, qualified wind energy equipment and qualified geothermal energy equipment. The credit percentages and credit expiration dates are:

Fuel cell, wind energy and geothermal equipment:

Credit available: through 2016
Credit percentage is: 30% (no dollar maximum)

Solar electric property and solar water heaters – The credit phases out over a period of years by reducing the credit rate for the year. However, there is no dollar limit for the credit.

Year Credit Percentage
Through 2019 30%
2020 26%
2021 22%

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits. However, the credits do not apply to equipment used to heat swimming pools or hot tubs.

Credit limitations – Although the residential energy efficient property credits can be used to offset both the regular tax and AMT, they are nonrefundable personal credits that can only reduce a taxpayer’s tax to zero; any remaining balance is not refundable. If the amount of the credit exceeds the taxpayer’s tax after subtracting other nonrefundable personal credits, the excess may be carried forward to the next tax year and added to the credit allowable for that year. CAUTION: Advertisements promoting solar systems advertise the credit, but avoid mentioning it is non-refundable. So if you are counting on the credit to cover a significant portion of your cost, it will do so only if your tax liability is large enough to absorb the full credit.


The Earned Income Credit

The EITC is for people who work, but have lower incomes. If you qualify, it could be worth up to $6,269 for 2016 (the credit is inflation adjusted annually, for years other than 2016 call this office). So, you could pay less federal tax or even get a refund. The credit is a refundable credit, so you can receive the benefits of the credit even if you may not owe any taxes. That’s money you can use to make a difference in your life. 

Over 23 million taxpayers receive in excess of $45 billion dollars in EITC – making the credit a great investment in the lives of those who claim it. However, the IRS estimates that 20 to 25% of people who qualify for the credit do not claim it. At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria.

The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must file a tax return to claim the credit.

If you were employed for at least part of the year, you may be eligible for the EITC based on these general requirements (the rates shown are for 2016):
  • You earned less than $14,884 ($20,434 if married filing jointly) and did not have any qualifying children.
  • You earned less than $39,298 ($44,848 if married filing jointly) and have one qualifying child.
  • You earned less than $44,648 ($50,193 if married filing jointly) and have two qualifying children.
  • You earned less than $47,957 ($53,507 if married filing jointly) and have more than two qualifying children.
In addition, you must meet a few basic rules:
  • You, and any qualifying child you claim for the EITC, must have a valid Social Security Number.
  • You must have earned income from employment or from self-employment.
  • Your filing status cannot be married, filing separately.
  • You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien, and filing a joint return.
  • You cannot be a qualifying child of another person.
  • If you do not have a qualifying child, you must:

    o be age 25 but under 65 at the end of the year,
    o live in the United States for more than half the year, and
    o not be a qualifying child of another person.
  • You cannot file Form 2555 or 2555-EZ (related to foreign earned income).
Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, then each of you can make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q.

If you have any questions, please give this office a call.

Child Tax Credit

Taxpayers who have a qualified child may be eligible for the child tax credit. The maximum credit amount is $1,000 and is generally non-refundable (can only offset income tax liability, both regular and alternative minimum (AMT)) but see exception below.

Exception: A taxpayer, who is unable to claim the full amount of the child tax credit because income tax liability is less than the credit amount, is allowed to take a portion of the tax credit as a refundable credit, referred to as the additional child tax credit. This credit is 15% of the taxpayer’s earned income in excess of a threshold amount, which is $3,000. Taxpayers with 3 or more qualifying children also take into consideration the amount of Social Security and Medicare taxes they paid. The combined nonrefundable and refundable credits can’t exceed the credit as computed after taking into account the adjustment for the modified AGI limitation (explained below).

A qualifying child for purposes of this credit is a child who

(1) is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild);
(2) is the taxpayer’s dependent;
(3) was under age 17 at the end of the tax year;
(4) did not provide over half of his or her own support for the tax year;
(5) lived with the taxpayer for more than half of the tax year; and
(6) was a U.S. citizen, a U.S. national, or a resident of the United States.

As with most tax benefits, the child tax credit begins to phase out when a taxpayer’s income reaches a specified threshold amount. The threshold amounts are $110,000 for married taxpayers, $55,000 for married taxpayers filing separately, and $75,000 for all others. The phase-out amount is $50 for each $1,000 (or fraction) of income in excess of the phase-out threshold.

Special Benefit–Military - Excluded combat zone pay of military taxpayers is treated as earned income for purposes of the computation of the refundable portion of the credit.

Taxpayer ID Numbers - The Protecting Americans from Tax Hikes Act of 2015 added program integrity provisions, which in the case of the child tax credit prohibits an individual from retroactively claiming the child credit by amending a return, or filing an original return if he failed to file, for any prior year in which the individual or a child for whom the credit is claimed did not have a taxpayer identification number (generally a Social Security number).

Improper Claims – Effective for years after 2015, when a taxpayer improperly claims the child tax credit, a disallowance period applies during which no child credit is allowed. The disallowance periods are:
  • Where the improper claim is due to fraud: 10 years. 
  • Where the improper claim is due to reckless or intentional disregard of rules and regulations (not fraud): 2 years.

Child & Dependent Care Credit

A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child (generally under 13 years of age), disabled child, spouse, or other dependent while the taxpayer is gainfully employed, (or is job seeking). In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care.

Generally, the credit is 20% of the cost of the care with a maximum expense limit of $3,000 for one child and $6,000 for two or more. However, for lower-income taxpayers, the credit percentage can be as high as 35%. The expenses that are taken into account for the credit are limited to a taxpayer’s earned income (i.e., income from working).

The limit must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. Generally, self-employed taxpayers use the net earnings on Schedule C as earned income.

The rules for qualifying for this credit are somewhat complicated and the following are some of more frequently encountered issues:

Qualifying Person Test - Your child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is:
  1. Your qualifying child who is generally your dependent and who was under age 13 when the care was provided, or
  2. Your spouse who was physically or mentally not able to care for him or herself and lived with you for more than half the year, or
  3. A person who was physically or mentally not able to care for him or herself, lived with you for more than half the year, and either:

    a. Was your dependent, or
    b. Would have been your dependent except that:
    i. he or she received gross income of $4,050 in 2017 (same as 2016) or more,
    ii. he or she filed a joint return, or
    iii. you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return.
Work-Related Expense Test - Child and dependent care expenses must be work-related to qualify for the credit. Expenses are considered work-related only if both of the following are true.
  • They allow you (and your spouse if you are married) to work or look for work.
  • They are for a qualifying person’s care.
Special Situations
  • Kindergarten – Generally, the cost of school (including private schools) from kindergarten and up are considered schooling, which does not count as a qualified expense. However, after school care generally qualifies if its cost is stated separately.

  • Summer School, Day Camp - Costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. The full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp is an employment-related expense.

  • Absent from Work - A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. However, for short temporary absences (generally two consecutive calendar weeks) where the taxpayer is required to pay for the care, the expenses may be counted.

  • Medical or Maternity Leave - Cost of care while a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave are not employment-related expenses.

  • Special Rule for Children of Separated or Divorced Parents - In the case of a child of divorced or separated parents, only the custodial parent may claim the credit, even if the non-custodial parent may claim the dependency exemption for that child. A custodial parent is the parent with whom a child shares the same principal place of abode for the greater portion of the calendar year.

  • Disabled or a Full-Time Student Spouse - For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. If the spouse is disabled or a full-time student, he or she generally will not have earned income. In this circumstance, the spouse’s income is imputed for each month he or she is disabled or a full-time student. The imputed amounts are $250 where there is one qualifying person and $500 where there are two. If both spouses were full-time students or disabled (and not working) in any given month, then only one can be considered to have the imputed income for that month. A part of a month is treated as a whole month.

  • Care Provided in Taxpayer’s Home – If the care services are provided in the taxpayer’s home, the care provider would be considered the taxpayer’s household employee and the household employee rules may apply.

  • Provider’s Tax ID Information – To claim the credit, a taxpayer must include the care provider’s name, address and tax ID number on the return when filing for the credit. It is recommended that IRS Form W-10 is used when obtaining the information. The form includes a place for the provider to sign.
This credit can be complicated and not all the details about the credit are included in the article. If you have questions about whether or not you qualify for the credit, please call this office.

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