After you determine your income tax liability you may be able to reduce that liability by claiming one or more tax credits. Most personal tax credits are allowed to the full extent of your regular tax liability and alternative minimum tax. But, it is important to note that they do not create a refund if they exceed your tax liability. Nonrefundable credits include the child tax credit, dependent care credit, adoption credit, education credits, retirement savings credit, credit for the elderly and disabled, mortgage interest credit, and D.C. first-time homebuyer credit. Refundable credits include the additional child tax credit, the earned income credit, and the health coverage credit. If the credit exceeds your tax liability, you will receive a refund for the excess.
Child Tax Credit for Children Under Age 17
For 2007, you generally may claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2007. To figure the exact amount of your credit, however, you must complete the “Child Tax Credit Worksheet” in the IRS instructions to Form 1040 or 1040A to determine if the credit is limited by your tax liability. Even if the credit does exceed your tax liability, part or all of the credit may be refundable as an additional credit on Form 8812 if your earned income for 2007 exceeds $11,300 or you have three or more children.
The credit may also be limited if your adjusted gross income (AGI) exceeds the $55,000, $75,000, or $110,000 phase-out threshold for your filing status. If your AGI exceeds the threshold, the IRS instructions direct you to the worksheet in Publication 972, where the phase-out rules and other credit limitations are applied.
Child and Dependent Care Credit
Did you hire someone to care for your children or other dependents while you work? If so, you may qualify for a tax credit for the expenses. You may claim the credit even if you work part time. The credit is generally available to the extent you have earnings from employment. If your employer has a plan qualifying you for tax-free child care, and if you are covered, you may be unable to claim a tax credit.
The credit is claimed on Form 2441 if you file Form 1040, or on Form 1040A, Schedule 2. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000.
The Adoption Credit
A tax credit of up to $10,960 may be available on your 2007 return for the qualifying costs of adopting a child under age 18, or a person who is physically and mentally incapable of self-care. The credit is phased out ratably for those with modified adjusted gross income between $164,410 and $204,410.
The credit is claimed on Form 8839. If you paid qualifying adoption costs in 2007 but the adoption was not final at the end of the year, the credit may not be claimed on your 2007 return.
If your employer pays your adoption expenses through a qualifying plan, this money can be excluded from your income, subject to rules similar to that of the credit. If you receive employer adoption benefits that are less than your qualifying adoption expenses, you may be able to claim the credit on Form 8839.
Residential Energy Tax Credits
The Energy Policy Act of 2005 created a number of limited tax credits for individuals who make energy savings improvements to their homes in 2006 or 2007. The residential energy credits are claimed on Form 5695, which must be attached to Form 1040. The maximum credit for all eligible improvements combined over both 2006 and 2007 is $500, of which no more than $200 can be for windows, but there are also separate caps on the credit for specific improvements. The increase in the basis of the residence due to the improvement is reduced by the amount of the credit.
To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements). Specific information regarding materials and equipment that qualify for the credit can be found at www.energystar.gov. Remember to obtain the manufacturer’s certification of the item at the time of purchase.
Tax Credit for Hybrid Vehicles
The alternative motor vehicle credit includes credits for hybrid vehicles purchased after 2005. The alternative motor vehicle credit replaces the deduction for hybrid vehicles that applied before 2006.
The amount of the credit depends on the vehicle’s fuel economy and the projected lifetime fuel savings. The maximum hybrid vehicle credit under the law is $3,400, but thus far, the highest certification has been $3,150.
How to qualify for the hybrid credit: Only the original purchaser of a new qualifying hybrid vehicle may claim the hybrid vehicle credit. If you lease a qualifying vehicle, only the leasing company (and not you) may claim the credit. The vehicle must be placed in service after December 31, 2005, and purchased on or before December 31, 2010. It must be used predominantly within the United States.
Hybrid credit is subject to phaseout on a manufacturer-by-manufacturer basis. Once a manufacturer sells its 60,000th hybrid vehicle after 2005 (all models), the tax credit for any of that manufacturer’s certified hybrids is reduced as follows: For the second and third calendar quarters after the quarter in which the 60,000th qualifying vehicle is sold, you may claim 50% of the credit. For the fourth and fifth calendar quarters, you may claim 25% of the credit; no credit is allowed after the fifth quarter. The credit for qualifying vehicles is claimed on Form 8910.