Credits are, in most cases, even better than deductions, because rather than simply reducing your taxable income, they reduce your tax due, dollar for dollar. Don’t miss out on claiming credits for which you might be eligible. Here’s a list of seven lesser-known credits that deserve a second look:
1. Alternative motor vehicle credit. The Energy Policy Act of 2005 introduced a tax credit for qualifying alternative motor vehicles purchased or placed in service on or after Jan. 1, 2006, and on or before Dec. 31, 2010. The credit can be claimed by the original purchaser of a new, qualifying vehicle; subsequent owners don’t qualify. If a qualifying vehicle is leased to a consumer, the leasing company, not the lessee, may claim the credit. You claim the credit using federal form 8910, Alternative Motor Vehicle Credit. The amount of the potential credit varies by type of vehicle and type of credit. The most popular of the credits — the hybrid vehicle credit — applies to approved vehicles that have drive trains powered by both internal combustion engine and a rechargeable battery; check the IRS website for the credits for various makes of the 2010 and 2011 models (as well as other model years)
2. Adoption credit. The rules changed significantly in 2010 with respect to the adoption credit. For 2010, qualifying expenses paid to adopt an eligible child can be used to claim a refundable credit; a refundable credit means you can apply the credit against tax due and are entitled to a refund if the credit exceeds your liability. In prior years, the credit was not refundable. To claim the credit, you must file a federal form 8839, Qualified Adoption Expenses, together with required documentation. The attachments vary depending on whether the adoption is foreign or domestic, final or not final, and if the adoption is for a special-needs child. Generally, a credit may be taken for qualifying expenses subject to income and dollar limits. Qualifying expenses include reasonable adoption fees, court costs, attorney fees, traveling expenses and other expenses directly related to the adoption. Restrictions apply, so be sure to read the fine print or check with your tax professional.
3. Health Coverage Tax Credit. The health coverage tax credit (HCTC) began in 2002 as an effort to make health care affordable for certain families by allowing taxpayers to pay only 20% of health insurance premiums. The HCTC was expanded in 2009 under the American Recovery and Reinvestment Act and is available on a monthly basis to help pay for health insurance as you go, or on a yearly basis when you file your federal income tax return. If you opt to receive the credit on your federal income tax return, you’ll need to file a federal form 8885, Health Coverage Tax Credit together with your return. Like the adoption credit for 2010, the HCTC is refundable. To qualify for the credit, you must be receiving Trade Adjustment Assistance (TAA) benefits — including Reemployment (RTAA) or Alternative (ATAA) — or receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC) and be 55 years old or older. To see if you qualify, check out the IRS website.
4. Saver’s Credit. The Retirement Savings Contribution Credit, known as the Saver’s Credit, allows taxpayers credit for up to half of contributions to an IRA or other qualified retirement plan. To qualify, you must be 18 or older and not a full-time student or claimed as a dependent on any other taxpayer’s return. For purposes of determining whether or not you are a student, a school includes most secondary education (such as college and university) as well as technical, trade and mechanical schools. It does not include on-the-job training courses, correspondence schools or schools offering courses only through the Internet. The credit is equal to a percentage of your qualifying contribution amount and is capped — if you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. Additionally, your adjusted gross income (AGI) must not exceed $55,500 if Married Filing Jointly; $41,625 if Head of Household; and $27,750 if Single, Married Filing Separately or Qualifying Widow(er). To calculate the credit, use federal form 8880, Credit for Qualified Retirement Savings Contributions and attach to your federal income tax return.
5. Foreign Tax Credit. Many taxpayers aren’t aware that the U.S. taxes its citizens (and residents, in most cases) on worldwide income. This means that you must report and pay tax on income from all sources, even from those sources outside of the U.S., unless otherwise excluded by treaty or agreement. If you must also pay tax on that income in another country, you could be subject to double tax. The idea of the foreign tax credit is to alleviate this problem. To qualify for the credit, you must have been subject to an income tax — and have paid or accrued the tax — outside of the U.S. Some exclusions and special circumstances apply, such as taxes paid to countries with governments not recognized by the U.S., countries with whom the U.S. does not have diplomatic relations, and countries designated by the Secretary of State as those that repeatedly provide support for acts of international terrorism. You can opt to itemize your foreign taxes paid as a deduction or claim the taxes as a credit. To choose the credit, you generally must complete federal form 1116, Foreign Tax Credit and attach it to your federal income tax return. However, you can still claim the credit and skip form 1116 if all of your foreign source income is passive, reported using a form 1099, and if the total of your foreign taxes paid in 2010 was $300 or less.
6. Credit For Prior Year Minimum Tax. Each year, many taxpayers are snared in the trap of paying alternative minimum tax (AMT). If you aren’t liable for AMT for 2010, but were subject to AMT in one or more previous years, you may be eligible for credit against your “regular” tax this year. To figure the credit, fill out federal form 8801, Credit for Prior Year Minimum Tax — Individuals, Estates, and Trusts and attach it to your federal income tax return. The credit is refundable and is generally limited to the lesser of $5,000 or a percentage of long-term unused minimum tax credit. Income phaseouts and other restrictions apply.
7. Credit for the Elderly or the Disabled. A credit exists for low-income taxpayers who are elderly or disabled. To qualify, you must be a U.S. citizen or resident alien who is either age 65 or older at the end of 2010 or under the age of 65 and retired on permanent and total disability, receiving taxable disability income for 2010 and not yet mandatory retirement age. The credit is based on your filing status, age and income. Strict income limits apply: You must consider both your adjusted gross income (AGI) and the amount of nontaxable social security and other nontaxable pensions you received. Your AGI, for example, must be less than $17,500 for individual taxpayers and $25,000 for married taxpayers when both taxpayers qualify for the credit (see the IRS website for more information about income limitations and restrictions). To claim the credit, you’ll complete Schedule R, Credit for the Elderly or the Disabled.