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Taxmap/pub17/p17-193.htm#TXMP69955b6e Chapter 39 Other Credits

Taxmap/pub17/p17-193.htm#TXMP7727c15b What's New

Taxmap/pub17/p17-193.htm#TXMP1e74d234
Adoption credit.

The maximum adoption credit increases to $10,390. See Adoption Credit, later for more information.

Taxmap/pub17/p17-193.htm#TXMP6303a93f
Excess withholding of social security tax and tier 1 railroad retirement tax.

Social security and tier 1 railroad retirement tax (RRTA) are both withheld at a rate of 6.2% of wages. The maximum wages subject to this tax increased to $87,900 in 2004. If you had two or more employers and they withheld too much social security or RRTA tax during 2004, you may be entitled to a credit of the excess withholding. For more information about the credit, see Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld under Refundable Credits, later.

Introduction

This chapter discusses the following credits.

• Adoption credit.
• Foreign tax credit.
• Mortgage interest credit.
• Retirement savings contributions credit.
• Credit for prior year minimum tax.
• Credit for electric vehicles.
• Credit for excess social security tax or railroad retirement tax withheld.
• Credit for tax on undistributed capital gain.
• Health coverage tax credit.

Several other credits are discussed in other chapters in this publication.

• Child and dependent care credit (chapter 34).
• Credit for the elderly or the disabled (chapter 35).
• Child tax credit (chapter 36).
• Education credits (chapter 37).
• Earned income credit (chapter 38).

Taxmap/pub17/p17-193.htm#TXMP10c6e9bc Nonrefundable credits.

Nonrefundable Credit

The first part of this chapter, Nonrefundable Credits, covers six credits that you subtract directly from your tax. These credits may reduce your tax to zero. If these credits are more than your tax, the excess is not refunded to you.

Taxmap/pub17/p17-193.htm#TXMP3d3c1a5b Refundable credits.

Refundable Credit

The second part of this chapter, Refundable Credits, covers three credits that are treated as payments and are refundable to you. These credits are added to the federal income tax withheld and any estimated tax payments you made. If this total is more than your total tax, the excess will be refunded to you.

Useful items

You may want to see:

Taxmap/pub17/p17-193.htm#TXMP23bb50f2 Nonrefundable Credits

Nonrefundable Credit

The credits discussed in this part of the chapter can reduce your tax. However, if the total of these credits is more than your tax, the excess is not refunded to you.

Taxmap/pub17/p17-193.htm#TXMP7de629ac Adoption Credit

Adoption

You may be able to take a tax credit of up to $10,390 for qualifying expenses paid to adopt an eligible child. A credit of up to $10,390 may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses.

If your modified adjusted gross income (AGI) is more than $155,860, your credit is reduced. If your modified AGI is $195,860 or more, you cannot claim the credit.

The amount of expenses paid or incurred before 2002 that can be taken into account is limited to the pre-2002 dollar limits. The limit on these expenses is $5,000 ($6,000 in the case of a child with special needs, defined later).

Taxmap/pub17/p17-193.htm#TXMP0b540685 Qualifying expenses.

Qualifying Expenses

Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.

Taxmap/pub17/p17-193.htm#TXMP6fedab49 Nonqualifying expenses.

Qualifying adoption expenses do not include expenses:

• That violate state or federal law,
• For carrying out any surrogate parenting arrangement,
• For the adoption of your spouse's child,
• Paid using funds received from any federal, state, or local program,
• Allowed as a credit or deduction under any other federal income tax rule, or
• Paid or reimbursed by your employer or any other person or organization.

Taxmap/pub17/p17-193.htm#TXMP4d1586b3 Eligible child.

Eligible child

The term "eligible child" means any individual:

1. Under 18 years old, or
2. Physically or mentally incapable of caring for himself or herself.

Taxmap/pub17/p17-193.htm#TXMP52acb42f Child with special needs.

An eligible child is a child with special needs if all three of the following apply.

1. He or she is a citizen or resident of the United States (including U.S. possessions).
2. A state (including the District of Columbia) determines that the child cannot or should not be returned to his or her parents' home.
3. The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by the state to make this determination include:
   1. The child's ethnic background,
   2. The child's age,
   3. Whether the child is a member of a minority or sibling group, or
   4. Whether the child has a medical condition or physical, mental, or emotional handicap.

Taxmap/pub17/p17-193.htm#TXMP308a0f17 When to claim the credit.

Generally, for any year before the adoption becomes final, you take the credit in the year after your qualified expenses are paid or incurred. See Publication 968 for more specific information on when to claim the credit.

Taxmap/pub17/p17-193.htm#TXMP43908560 Foreign child.

If the child is not a U.S. citizen or resident, you cannot take the credit unless the adoption becomes final. You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.

Taxmap/pub17/p17-193.htm#TXMP19148352 How to claim the credit.

To claim the credit, you must complete Form 8839 and attach it to your Form 1040 or Form 1040A. Enter the credit on Form 1040, line 52, or Form 1040A, line 34.

Taxmap/pub17/p17-193.htm#TXMP47f6b4b0 Foreign Tax Credit

Foreign Tax Credit

You generally can choose to claim income taxes you paid or accrued during the year to a foreign country or U.S. possession as a credit against your U.S. income tax. Or, you can deduct them as an itemized deduction (see chapter 24).

You cannot take a credit (or deduction) for foreign income taxes paid on income that you exclude from U.S. tax under any of the following.

1. Foreign earned income exclusion.
2. Foreign housing exclusion.
3. Possession exclusion.
4. Extraterritorial income exclusion.

Taxmap/pub17/p17-193.htm#TXMP408230e7 Limit on the credit.

Limit on the credit.

Unless you can elect not to file Form 1116, your foreign tax credit cannot be more than your U.S. tax liability (Form 1040, line 43), multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. See Publication 514 for more information.

Taxmap/pub17/p17-193.htm#TXMP089abdab How to claim the credit.

Complete Form 1116 and attach it to your Form 1040. Enter the credit on Form 1040, line 46.

Taxmap/pub17/p17-193.htm#TXMP01b64b57 Election not to file Form 1116.

You will not be subject to the limit and may be able to claim the credit without using Form 1116 if all the following requirements are met.

1. Your only foreign source income for the tax year is passive income (dividends, interest, royalties, etc.) that is reported to you on a payee statement (such as a Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income).
2. Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return) and are reported on a payee statement.
3. You elect this procedure for the tax year.

If you qualify and elect not to file Form 1116, enter the amount of your foreign taxes paid on Form 1040, line 46.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year.

Taxmap/pub17/p17-193.htm#TXMP52f4b1ea Mortgage Interest Credit

Mortgage Interest Credit

The mortgage interest credit is intended to help lower-income individuals afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay.

Taxmap/pub17/p17-193.htm#TXMP08cb83f7 Who qualifies.

Who qualifies.

You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.

Taxmap/pub17/p17-193.htm#TXMP3a579bcc Amount of credit.

Figure your credit on Form 8396. If your mortgage is equal to (or smaller than) the certified indebtedness amount (loan) shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.

If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.

	Certified indebtedness amount on your MCC
	Original amount of your mortgage

If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. See Publication 530 for further information.

If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.

Taxmap/pub17/p17-193.htm#TXMP166fc05d Carryforward.

Carryforward

If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.

If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).

Taxmap/pub17/p17-193.htm#TXMP1c47ee80 How to claim the credit.

Figure your 2004 credit and any carryforward to 2005 on Form 8396, and attach it to your Form 1040. Be sure to include any credit carryforward from 2001, 2002, and 2003.

Include the credit in your total for Form 1040, line 53, and check box a.

Taxmap/pub17/p17-193.htm#TXMP596b09b6 Reduced home mortgage interest deduction.

Reduced home mortgage interest deduction.

If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on line 3 of Form 8396. You must do this even if part of that amount is to be carried forward to 2005. For more information about the home mortgage interest deduction, see chapter 25.

Taxmap/pub17/p17-193.htm#TXMP774c054d Recapture of federal mortgage subsidy.

Recapture of federal mortgage subsidy.

If you received an MCC with your mortgage loan, you may have to recapture (pay back) all or part of the benefit you received from that program. The recapture may be required if you sell or dispose of your home at a gain during the first 9 years after the date you closed your mortgage loan. See Publication 523, Selling Your Home, for more information.

Taxmap/pub17/p17-193.htm#TXMP4c4648ab Retirement Savings Contributions Credit

Retirement Savings Contributions Credit

You may be able to take a tax credit of up to $1,000 ($2,000 if married filing jointly) for making eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA). The credit is a percentage of the qualifying contributions, with the highest rate for taxpayers with the least income.

You cannot claim this credit if any of the following apply.

1. The amount of your 2004 adjusted gross income (discussed next) is more than $25,000 ($37,500 if head of household, $50,000 if married filing jointly).
2. You were born after January 1, 1987.
3. You are claimed as a dependent on another person's 2004 tax return.
4. You were a full-time student in 2004.

The amount of credit you can take depends on your filing status, your adjusted gross income (AGI), and your eligible contributions.

Taxmap/pub17/p17-193.htm#TXMP2c5d187f Adjusted gross income (AGI).

This is generally the amount on Form 1040, line 37, or Form 1040A, line 22. However, you must add to that amount any exclusion or deduction claimed for the year for:

• Foreign earned income,
• Foreign housing costs,
• Income for residents of American Samoa, and
• Income from Puerto Rico.

Taxmap/pub17/p17-193.htm#TXMP2fc88f21 Eligible contributions.

Eligible contributions.

These include contributions to a traditional or Roth IRA and salary reduction contributions (elective deferrals) to most employer-sponsored retirement plans. They also include certain voluntary after-tax employee contributions.

Taxmap/pub17/p17-193.htm#TXMP2bc4a336 Contributions reduced.

Your eligible contributions must be reduced by certain taxable and nontaxable distributions made after 2001 and before the due date (including extensions) of your 2004 tax return.

See Publication 590, chapter 4, for more specific information on eligible contributions and the reductions you must make.

Taxmap/pub17/p17-193.htm#TXMP65d41825 Limit on the credit.

Limit on the credit.

After your contributions are reduced, the maximum annual contributions on which you can base the credit is $2,000 per person. This makes the maximum possible credit $1,000 per return ($2,000 if married filing jointly).

Taxmap/pub17/p17-193.htm#TXMP4aed3ee3 How to figure and report the credit.

The amount of the credit you can get is based on the contributions you make and your credit rate. Your credit rate can be as low as 10% or as high as 50%. Your credit rate depends on your income and your filing status. See Form 8880 to determine your credit rate.

The maximum contribution taken into account is $2,000 per person. On a joint return, up to $2,000 is taken into account for each spouse.

Figure the credit on Form 8880. Report the credit on line 50 of your Form 1040 or line 32 of your Form 1040A and attach Form 8880 to your return.

Taxmap/pub17/p17-193.htm#TXMP153ef0b5 Credit for Prior Year Minimum Tax

Prior Year Minimum Tax Credit

The tax laws give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. If you benefit from these laws, you may have to pay at least a minimum amount of tax in addition to any other tax on these items. This is called the alternative minimum tax.

The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. If in prior years you paid alternative minimum tax because of these tax postponement items, you may be able to claim a credit for prior year minimum tax against your current year's regular tax. The amount of the credit cannot reduce your current year's tax below your current year's tentative alternative minimum tax.

You may be able to take a credit against your regular tax if for 2003 you had:

• An alternative minimum tax liability and adjustments or preferences other than exclusion items,
• A minimum tax credit that you are carrying forward to 2004, or
• An unallowed nonconventional source fuel credit or qualified electric vehicle credits.

Taxmap/pub17/p17-193.htm#TXMP387b408d How to claim the credit.

Figure your 2004 credit and any carryforward to 2005 on Form 8801, and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54, and check box b. You can carry forward any unused credit for prior year minimum tax to later years until it is completely used.

For additional information about the credit, see the instructions for Form 8801.

Taxmap/pub17/p17-193.htm#TXMP06796806 Qualified Electric Vehicle Credit

Qualified Electric Vehicle Credit

You may be allowed a tax credit if you placed a qualified electric vehicle in service during the year.

Taxmap/pub17/p17-193.htm#TXMP310b5bf5 Qualified electric vehicle.

Qualified Electric Vehicle

This is a vehicle that:

• Has at least four wheels and is manufactured primarily for use on public streets, roads, and highways,
• Is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current,
• Is originally used by you,
• Is acquired for your own use, not for resale,
• Has never been used as a nonelectric vehicle, and
• Is used predominately in the United States.

Taxmap/pub17/p17-193.htm#TXMP6b9aea25 Amount of credit.

If you placed a qualified electric vehicle in service during 2004, the credit is generally 10% of the cost of the vehicle. However, if the vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit. See Publication 463, Travel, Entertainment, Gift, and Car Expenses, for information on the section 179 deduction.

The credit is limited to $4,000 for each vehicle placed in service in 2004.

Taxmap/pub17/p17-193.htm#TXMP2f433445 Recapture.

Recapture

The credit will be subject to recapture if, within 3 years after the date you place the vehicle in service, the vehicle is used predominately outside the United States or is modified (or its use is modified) so that it is no longer eligible for the credit. You recapture the credit by adding part or all of it to your income tax for the year in which the recapture event occurs. See chapter 12 of Publication 535 for more information.

Taxmap/pub17/p17-193.htm#TXMP3482f5f9 How to claim the credit.

To claim the credit, complete Form 8834 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54. Check box c, and print "8834" on the line next to box c.

Do not confuse this credit with the deduction for clean-fuel vehicles.

Previous Page:  Publication 17 - Your Federal Income Tax - Advance Earned Income Credit Next Page:  Publication 17 - Your Federal Income Tax - Refundable Credits Use     to find additional instances of index items.