As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.

How to Save with 28 Federal Income Tax Credits!

We have put together for you the below listing of the basic rules for tax deductible savings from some 28  Federal Tax Credits. (For additional tax savings laws, please see our listing of Federal Tax Deductions and State Tax Deductions and State Tax Credits under our Tax Preparation listing.)

The tax deductible savings you receive by claiming a Federal Tax Credit does not depends on your top tax bracket as deductions do.  Rather credits are based on a percentage determined by the rules of each credit.   Depending on the particular credit, you may save 10% all the way to 100% of your qualifying amount!  

There are two types of credits.  1)  Nonrefundable credits  help you save when you have tax that you can reduce.  2) Where as  Refundable credits give you money back when even when you don't have any tax to reduce.   In this article we will start by looking at the savings of nonrefundable credits and then look closely at how you can save with refundable credits.    Let us know if you have questions. Killingbeck Insurance, Kokomo Indiana, 765-452-8000.

Nonrefundable Federal Tax Credits that Reduce Tax

  1. Foreign Income Tax Credit Saving

    1. If foreign tax is reported on 1099-Int or 1099-Div, and amount is under $300 ($600 Married Filing Joint), enter credit for tax paid directly on the back of the 1040. Can claim only on passive income (not earned income).
    2. For tax on other foreign income or on amounts over $300 single or $600 joint, you must complete form 1116 to get credit for foreign taxes paid.  Taxpayer must not be eligible for a refund of these foreign taxes.
    3. The amount of your foreign tax paid saves by reducing your tax by 100% of foreign taxes paid. 
    4. Credit can't be more than U.S. tax liability multiplied by a percentage.

  2.  Child & Dependent Care Tax Credit Savings

    1. Must live in taxpayer's abode for ½ the year except for temporary absence.  A parent who does not provide physical custody for greater part of the year cannot claim credit. 

    2. If married, must file a joint return unless they qualify as Head of Household.  Cannot claim if filing Married Filing Separately.

    3. Age & Relationship--Qualifying individuals:
      1. Your qualifying child under age 13 you claim as a dependent or could have claimed except for non-custodial parent rules. 
      2. Qualifying child is: Taxpayer’s child, adopted child, child placed by authorized service, brother, sister, step brother-sister or a descendant of any these such as a grandchild, niece/nephew.
      3. The taxpayer’s disabled spouse or disabled dependent of any age, or a person of any age that would have been a dependent except they filed a joint return, had $3,900 of income, or you or spouse could be claimed as a dependent on someone else's return.  
    4. Care must be paid so taxpayer can work or look for work.  If Married, both must be working unless one is full time student, looking for work or disabled.
      1. If looking for work, must have earned income for the year.
      2. Can’t deduct more than lowest spouse’s income.
             (a)  A full time student or disabled spouse is considered to earn
                   $250 per month with 1 child, $500 for 2 or more children.

    5.  Payments for child care were not to a person
      1. claimed as a Dependent,
      2. to a qualifying child of taxpayer,  
      3. to taxpayer’s child under age 19,
      4. to a person who was your spouse at any time during the year or
      5. to the parent of a qualifying person if qualifying person is your child under 13. 

    6.  Must pay taxes if a Household Employee.

    7.  Other Dependent Care Rules:
      1. Must include Social Security # of care provider or credit will be denied unless there is a reasonable cause.
             (a)  Exception:  Do not need ID # if care provider is a tax exempt charity.
             (b)  If can't get Social Security #, attach statement to return explaining.
      2. Don’t include costs when off sick or on vacation.
      3. If dependent care expenses are listed in box 10 of W-2, you need to complete 2441 to see if can exclude part or all of the benefits. 

    8. The credit is based on the:  
      1. Amount paid up to $3000 for one child, $6000 for more than one child. Please note this is not a $3000 per child limit but $6000 total limit.
      2. The credit is 35% below $15,000 AGI, reduces to 20% over $43,000.
      3. Can elect whether to include or exclude nontaxable combat pay (can’t use a partial amount.)

    9. Employer provided plan  can only deduct up to $5000.  So if taxpayer pays extra on their own, they can claim extra amount up to the $6000 total limit (or $1000 difference) 
      1. If taxpayer receives child care benefits through work, they need to report those benefits on the Child Care form and claim a deduction for expenses.

    10. Deductible expenses include: 
      1. Costs of a housekeeper, maid or cook if part of their service is for the well-being of a qualifying spouse or dependent.
      2. Necessary medical care for individual.
      3. Child care expenses include: care in home, at nursery or day care center, day care of pre-kindergarten grade (no longer includes kindergarten), care after school, day camp, and transportation costs if provided by caregiver, and cost of payroll taxes of caregiver in home.
      4. Disabled dependent expenses are only allowed for services in your home.  Exception:  Out of home cost such as special schools (may be able to claim excess as medical expenses) are allowed as long as in home 8 hours a day. 

  3. Education Income Tax Credits Savings 

    1. No credit is allowed if file Married Filing Separately.
    2. IRS is sending letters to verify payment of expenses in box 2 (billed to) of 1098-T & of other expenses claimed (not box 1 paid expenses).  IRS may ask for receipts.

    3. Qualified Expenses include
      1. Lifetime Learning Credit can normally deduct only tuition and fees.   Can only claim books and supplies if they must be paid to the educational institution as a condition of enrollment.
      2. For American Opportunity Credit can claim tuition, fees, books, supplies and equipment purchased. 
             (a)  Supplies could include printer supplies as well as other supplies.
             (b)  Equipment might includes computers, printers, etc.    
      3. Can’t deduct expenses paid by scholarships.

    4. Must be for expenses of taxpayer, spouse, or a dependent claimed on return.
      1. Only the person who claims the student as a dependent can claim the student's education costs.
      2. Costs paid by student or a 3rd party are treated as if parent paid if student is dependent of parent.  If not a dependent, then treated as student paid.  (For example, expenses paid by grandparent of parent who can't claim child.)

    5. Student can claim credit only if parent does not claim student as a dependent.   But child still cannot claim his own exemption if a dependent of the parent.  It may be advantageous for a parent who doesn't qualify due to AGI to not claim child so child can claim the education expenses on their return.  But refundable part of credit is not refundable to the student.  No one would claim the dependent exemption. 

    6. Only claim one credit per student per year.
      1. Can’t claim
            (a)  deduction for tuition and fees on same student as credit.
            (b)  different credits on same student.
            (c)  itemized deduction for education and credit or deduction on same student.
      2. Can claim
            (a)  credit and Coverdell ESA or 529 exclusion on different expenses in the same year.
            (b)  different credit or deduction on different students.
            (c)  student interest and education credit.

    7. Expenses paid by loan are deemed paid when expense is paid.

    8. Tuition Adjustment for Prior Year
      If box 4 of Tuition Statement 1098-T shows an adjustment made for prior year (such as child dropped class and received a refund), and you claimed an education credit,  you must recomputed credit that should not have been claimed and write on line 44 “recaptured education credit.”

    9. Compare the credits and education deduction to see which gives best results.  Different phase out amounts, taxpayers tax bracket, and different rules make it so you have to compare which will work the best.

    10. Expenses paid in December of the current tax year for next year's education expenses, can only be deducted if they are for education starting in the first 3 months of the next year.  
    11.  Tuition & Fees Phase Out     
       See Tuition and fees deduction.
       Single, HH, QW             MFJ                                  Deduction limit
       $0 -  $65000                   $0          -  $130,000         $4,000    
       $65,000  -  $80,000       $130,001 - $160,000           $2,000
       Over $80,000                Over $160,000                   $0 

    12. American Opportunity Income Tax Credit Savings

      1. Phase out is Married Filing Joint $160,000 - $180,000,   Single $80,000-$90,000.
      2. Must be pursuing an undergraduate degree or other recognized education credential.  No graduate programs.
             (a)  Available ONLY for 4 years per student including any year Hope credit was claimed.
             (b)  At beginning of tax year, the student had not completed undergraduate degree. 
             (c)  Must be enrolled at least ½ time (as school defines) for at least one semester & enrolled in degree program.
      3. Eligible costs include tuition and fees, books, supplies, and equipment (computer, printer, etc.) purchased.
      4. Not allowed to have a felony drug conviction.
      5. Credit is up to $2500 100% of first $2000 of education expenses & 25% of next $2,000 of expenses.
      6. Up to 40% of credit maximum of $1000 is refundable unless taxpayer is subject to Kiddie tax.
    13. Lifetime Learning Income Tax Credit Savings

      1. Phase out is:  Married Filing Joint $108,000 - $128,000,  Single $54,000-$64,000.
      2. No restrictions on drug conviction, hours enrolled, number of years you can take, or requirement to be a degree candidate.
      3. Each student is allowed a credit of 20% of expenses paid with a maximum per tax return for all students of $10,000 per year.  The maximum credit is $2000 per year.
      4. Eligible costs include only tuition and fees unless required to buy supplies or books from educational institution.

  4. Retirement Savings Income Tax Credit Savings:  Form 8880

    1. This Credit is a nonrefundable credit for low income taxpayers who contribute to a retirement plan: traditional or Roth IRA, 401K, 403B, Simple or SEP plan.
    2. Income limits:  AGI must be under Married Filing Joint $59,000, Head of Household $44,250 and Single $29,500.
    3. Can’t Claim Credit if taxpayer is
              i.   a dependent,
             ii.   under 18 or
            iii.   a full time student for 5 months of the year.
    4. Credit is reduced if money taken out of retirement account in current year (including up to 4-15) or in last two years.  
      1.  If married in last two years but not now, must also take into account distribution spouse took in those 2 years.
    5. The credit varies according to filing status & AGI:
      1. Married Filing Joint:   50% up to $36,000,  20% to $39,000, 10% to $60,000
      2. Head of Household:   50% up to $27,000,  20% to $29,250, 10% to $45,000
      3. Single:                        50% up to $18,000,  20% to $19,500, 10% to $30,000

    6. Maximum credit is $1000 ($2000 Married Filing Joint, if both qualify)
    7. Contributions limited to $2000 a year for each taxpayer.

  5. Child Income Tax Credit Savings

    1. Child must be taxpayer’s dependent who was a U.S. Citizen or resident of the U.S., Canada or Mexico.
    2. Child must be under age 17 at year end.
    3. Child lived with taxpayer for over 1/2 the year unless qualifies for below exceptions.
      1. Child of separate or divorced parents. See rules in Can I Claim My Dependent  section in Tax Preparation menu.  
      2. Temporary absence including birth, death, adoption, temporary absence for school, vacation, illness, military, juvenile detention. 
    4. Must be taxpayer’s son, daughter, stepchild, adopted child, foster child placed by an authorized service, brother/sister, step-brother/sister or a descendent of any of them including grandchild, niece.   
    5. Child must not provide over 1/2 of their own support.

    6. How Is the Credit Computed?
      1. Taxpayers with qualifying children are allowed a credit against tax of up to $1000 per child. 
      2. Tax credit phases out at higher income levels.   
             BEGINNING PHASE OUT                        ENDING PHASE OUT
                                                         1 child       2 children    3 children   4 Children
             MFJ      $110,000                $129,001     $149,001      $171,001      $189,001
             Single  $  75,000                $  94,001     $114,001      $134,001      $154,001
             MFS      $  55,000                $  74,001     $  94,001      $114,001      $134,001

    7. Additional Child Tax    This credit is for taxpayers who income was too low to get full $1000 child tax credit per child. 
      1. Taxpayers must have more than $3000 earned income to qualify.            
      2. Tax free combat pay is treated as earned income in figuring refundable credit.
      3. With 1 or 2 children, the credit is also refundable to up to 15% of the amount that earned income exceeds $3,000 plus tax free combat pay.  
      4. With 3 or more children the credit is refundable up to extent of Social Security and Medicare tax withheld.

  6. Energy Income Tax Credits Savings:  Form 5695

    Energy Efficient Homes (Non-business property): Use form 5695.

    a.  Credit is 10% of qualified improvements up to a total credit of $500. 
                 However there are specific limits on certain items.
    b.  The credit is reduced for any credit claimed since 2006.
    c.  The below items must meet certified guidelines.  Insured should retain copy of certification.  
                 $500 total limit for all items.
        i.  10% limit on insulation, exterior doors & pigmented roof up to $500.
               ii.  10% on exterior windows, storm windows, up to $200.
              iii.   $300 for qualifying water heater or heat pump.               iv.   $300 for qualifying central air conditioner.
                      v.   $150 for any qualifying furnace or boiler.  
      vi.   $50 for any qualifying fan used in a furnace. 
    d.  Can not claim installation costs on windows, doors, insulation, roofs.
    e.  The credit is not refundable, it only offsets tax.  Can’t carry unused amounts to next year.  

    Residential Energy Efficient Property     

    a.  The credit is 30% of cost of solar energy systems (water heating and electricity),
          fuel cells, small wind energy systems, and geothermal heat pumps.    
              i.  There is no maximum credit except for fuel cells which are limited to
                       $1000 per kW of capacity.             
    b.   Must be for taxpayers residence in U.S. with +80% personal use.
          Prorate credit if personal use is under 80%.          
    i.  Only fuel cells must be for a primary residence.            
    ii.  Can’t be for swimming pools or hot tubs.     
    c. Includes installation costs.     
    d. Includes new construction. Deduct when use begins.    
    e. Must be certified equipment.  Need to keep proof of certification.        
    i.  Geothermal Heat Pump  
          Closed loop  14.1 EER, 3.3COP                
          Open loop 16.2 EER, 3.6 COP
          Direct Expansion 15 EER, 3.5COP     
    f. The credit is taken in Part II of 5695 and is not refundable, it only offsets tax.

  7. Income Tax Credit for Elderly or Disabled Savings

    1. Uses Schedule R.  Our tax program computes automatically.
    2. Maximum credit is $1,125.
    3. Watch for this credit as you don’t see very often.  Usually taxpayer receives over $5000 social security or income is too high.   Works most often in year retired or disabled. 
    4. Who Qualifies for the credit? 
      1. The credit for the elderly is for ANYONE AGE 65 OR OLDER who falls below the income level.
      2. The credit for disability is for ANYONE UNDER AGE 65 WHO IS PERMANENTLY AND TOTALLY DISABLED below the income level.
    5. How Credit is computed: 
      1. If under age 65, you must access Schedule R so that tax program knows taxpayer is disabled.
      2. Age 65 or older, the tax program computes automatically based on Social Security you enter.
      3. Watch:   If you forget to enter Social Security for taxpayer, the tax program will give
                       them a credit when they don’t deserve it.  Watch back of 1040.
    6. Permanently & totally disabled is defined as being unable to work because of a condition that  lasts over 12 months or expect to lead to death.
      1. Doctor must sign a statement verifying the disability.  Need only attach the physicians statement the first year. 
      2. Are considered retired when they stopped working not when formally retired.
    7. Income is too high when AGI or nontaxable benefits (Social Security, Railroad Retirement, or V.A. Disability) exceed:  
                                                                            AGI            Nontaxable benefits*
                SINGLE                                          $17,500               $5,000
                MFJ (both qualifying)                     $25,000                $7,500
                MFJ (one qualifying)                      $20,000                $5,000
                Married Filing Separately               $12,500                $3,750

  8. Mortgage Interest Income Tax Credit Savings: Form 8396

    1. Must have state issue mortgage credit certificates. 
    2. The credit is determined by multiplying the percentage on the certificate by the amount of interest paid.  If the percentage on the certificate exceeds 20%, the credit is limited to $2000.
    3. Any amount taken as a credit must be deducted from mortgage interest on Schedule A.
    4. If home sold at a gain or refinanced (unless reissued) within 9 years, must recapture part of credit on form 8828.
    5. If credit exceeds tax, it can be carried forward to next year.

  9. General Business Credit: Form 3800 

    a.  This form consists of a number of credits we rarely see usually for partners, s-corp. owners,
                  self-employed or owners of rental properties.  Includes:  low income housing, rehabilitation,
                  historical home, work credits, disability access, research, alcohol used as fuel, etc.
    b.   Also, this is where the energy credit for depreciable property comes to from Form 3468.  
                  Includes solar panel, geothermal, fuel cell, wind power (extended 12/31/13).
                  Credit is depends on item.
    c.   Can carry credit back 5 years.
  10. Prior Year Minimum Tax Credit: Form 8801

    If taxpayer paid alternate minimum tax in a prior year and this years tax is not based on the alternate minimum tax, they qualify for a credit.  Tax 
    program usually computes based on carryover from last year.
  11. Credit to holders of tax credit bonds: Form 8912

    A. State and local governments can issue Build American 
        Bonds after 2-17-09 and before 1-1-2011.  
    B. These bonds may provide both taxable interest and a federal tax credit to the bondholder.  
    C. The amount of the credit is 35% of the interest on the bond.  
    D. Build American Bonds are issued on qualified forestry conservation, clean renewable energy, 
    1. qualified energy conservation, qualified zone academy, and qualified school construction.

  12. Work Opportunity Credit: Form 5884

                    a.  Credit applies to wages paid before 12/31/2014 to 9 targeted
                         target-high-groups (including certain veterans) with particularly high
                         unemployment rate or special employment needs.
                    b.   Must be certified before starting work by State.
                    c.   Credit varies according to several factors.  ($2400-$9600)

13.  Small Employer Health Insurance Credit: Form 8941

       Very complicated to compute.

                    a.   Employer must have less than 25 full time employees.
                    b.   Average annual wages for employees must be under $50,000 and employer must pay 
                          at least ½ of health insurance for employee.  Employees not included in making the 
                          determination are owners, Sub-S shareholders or family members.  
                    c.   Use Form 8941.  Credit ranges from 2% to 35% of health insurance paid. 
                          Credit also limited by average cost paid per state you live in.
                    d.   Must reduce health insurance deduction by amount of credit claimed.


14.  2-3 Wheel Plug-in Electric Vehicle Income Tax Credit Savings:
       Form 9936.

15. Plug-in Electric Drive Vehicle Income Tax Credit Savings:  
      Form 8936

16.  Plug-in Conversion Income Tax Credit Savings:  Form 8910

Credit expired 12/31/2011.

17.  Alternate Motor Vehicles:  Form 8910

18.  Alternate Fuel Credit:  Form 8911

  Any fuel at least 85% of ethanol, natural gas, liquefied natural gas, liquefied petroleum 
        gas or hydrogen.  Or a mix consisting of two or more of biodiesel, diesel fuel or kerosene.

18.  Adoption Credit:  Form 8839

a.  Can e-file.  IRS may send letter asking for: 
1.  Copy of adoption certificate or order.    
2.  If U.S adoption not finalized, enter ETIN on 8839.
3.  If special needs child, keep certificate.  
4.  A written statement explaining each expense with copies of cancelled checks and receipts.
b.  Credit is phased out between $197,880 - $237,880 AGI 
      The credit is 100% of qualified expenses up to $13,196 for each qualified child.  
    1. This limit is cumulative over all tax years for each child.     
    2.  Unmarried individuals can split credit in any way they agree.
c. Can’t claim if Married Filing Separately unless files Head of Household.
d. Qualifying Child must be under 18 or unable to care for self.
e.  Special needs child must be a citizen or resident of US (including possessions) and certified by the state.
Taxpayer gets full $12,970 deduction for special needs child whether taxpayer paid the full amount or not.
f. Expenses paid before year of adoption, can’t be deducted until year after payment for U.S. child (or U.S. resident) or year of adoption for non-U.S. child or special needs child.  
g. Expenses from an unsuccessful foreign adoption are added to later costs of a successful adoption.  U.S. adoption can claim in year paid.
h. Qualifying expenses include reasonable and necessary expenses such as adoption fees, court costs, attorney fees, traveling expenses, meals, lodging & other 
    related expenses.
h.  Can’t claim surrogate parent costs or adopting spouse’s child.
i.   Can claim if filing with an ATIN instead of SS#. Can’t if ITIN.
j.  Can carry forward unused credit for up to 5 years.


Income Tax Credits that are Refundable

Refundable income tax credits give you money back (or savings against tax) when even when you don't have any tax to reduce.

  1. Earned Income Tax Credit With Children Savings Requirements:  

    1. Taxpayer or Spouse requirements:

      _ Can’t file Married Filing Separately.
      _ Can’t be a qualifying child of another person.
      _ Can’t have investment income >$3300 (includes interest, tax exempt interest, dividends, net rent & net capital gains.)
      _ Can’t have an ITIN.  Taxpayer & child must has Social Security #,
      _ Can’t claim foreign earned income tax deduction. (Form 2555)
      _ Must have earned income below limits in table below.
      _ Anyone who is a nonresident alien part of the year can't claim credit. 

    2. Child requirements:

      _ Lived in taxpayers home in U.S. for over 6 months except birth, death, military service, adoption or temporary absence.
               i.  This is not a requirement to maintain a home.
               ii.  A taxpayer in the military is treated as having the child live in their household.
      _ Child is younger than taxpayer unless disabled.
      _ Is -19, or -24 & full time student for 5 months or disabled.
      _ Is Taxpayer’s child, adopted child, child placed by authorized service, brother, sister, step brother-sister or a descendant of any of
      these such as a grandchild, niece or nephew.
                i.  Married Child must be a dependent (unless release signed.)
                ii.  No requirement for a single child to be a dependent.
      _ Child & spouse didn’t file joint return except for full refund only of withheld income taxes.
      _ Be a U.S. citizen or resident alien the entire year.
      _ Child isn’t claimed as a qualifying child of another taxpayer.   

    3. If child qualifies as qualifying child for more than 1 taxpayer:

      1.  If one of the qualifying parties (meets tests 1 & 2) is child’s parent,
            (a)  That parent can claim or
            (b)  If parent(s) qualifies but doesn’t claim child, a relative who meets tests 1 & 2 can claim if their AGI is > parent(s) who can claim child or 
            (c)  If more than 1 relative qualifies and both of their AGIs are > parent(s), then only relative with highest AGI can claim.
      2. If Parents don't qualify to claim child (don't meet tests 1 & 2) or qualifying parent(s) doesn’t file a return or parent files solely for a full refund of income taxes (no EIC …)  then can only go to qualifying relative with highest AGI.

      3. If 2 parents qualify to claim child (meet tests 1 &2)
            (a)  Parents can decide who will claim.
            (b)  If don’t agree, parent who child lived with the most nights during year (or  would have except for temporary absence) is the custodial parent. Don’t count days after child turns 18.
            (c)  If child lived with parents equally, goes to parent with highest AGI

    4. Must have Earned income & AGI be under limits listed below.  Unemployment isn’t earned income. 

                AGI is Less than  MFJ             Other than MFJ        Max. Credit
                3 children        $52,427                     $46,997                 $6,143
                2 children        $49,186                     $43,756                 $5,460
                1 child              $43,941                     $38,511                 $3,305
      1. Earned income includes wages, sick pay, salaries, tips, disability pensions & income or loss from a business.
      2. Nontaxable Combat Pay can be included in earned income for computing EIC and additional Child Tax Credit.  Can either include or exclude (no partial amount)
      3. Unemployment is not earned income. 

    5. Where there is a noncustodial parent
      1.  If Noncustodial parent meets the following requirements they can claim the dependent and the Child Tax Credit (NOT EIC).        
      2.     (a)  Parents lived apart at all times the last 6 months of the year.
            (b)  Child lived with 1 or both parents over ½ the year.
            (c)  Child received over ½ support from parents.
            (d)  Child is under age 18 ½ at end of year.
            (e)  An 8332 or divorce qualifies them to claim.
      3. The Custodial parent, if they qualify, can claim Head of Household, Dependent Care and EIC.

    6.  EIC is a refundable credit. Refundable means they can receive a refund for the credit even if there is no tax to offset against.
    7.  Double check child's year of birth, last name & Social Security # closely as IRS verifies against Social Security records.
      1. IRS will send return back to taxpayer if these items do not match the Social Security records (or we’ll receive a reject on on an electronic return)
      2. If information is correct, taxpayer will need to check with Social Security Administration to get Social Securty records corrected.

    8. If IRS denies an Earned Income Credit, the IRS will not give earned income credit on that taxpayer until they file Form 8862 proving they qualify.  
      1. Can be denied for 2 years where claimed in disregard of tax law. 
      2. Can be denied up to 10 years for fraud.

    9. Do not include income from work performed while an inmate in a penal institution. 

    10. Church Employees and Clergy:  Determine how much of 1040 line 7 was also reported on Schedule SE, line 5a.  On the EIC worksheet, subtract that amount from the amount on 1040 line 7.     
    11. Child ID & Self Employment.  To help prevent a possible delay or audit, copy & lnote on EIC worksheet child's ID, school, medical or other records showing child lives at home.  
      1. For business, copy & note proof of business activity.
  2. Earned Income Tax Credit Without Children Savings

    1. AGI must be under $20,020 MFJ or $14,590 other than MFJ.  Maximum credit is $496. 
    2. Taxpayer or spouse is age 25 to 64 at year’s end.
    3. Are not a dependent or qualifying child of another.
    4. Must be a resident of the US for over ½ the year.
    5. If married and filing a joint return you generally cannot be qualifying child of another.
  3. Additional Child Income Tax Credit Savings

    1. This credit is for taxpayers whose income tax was too low to get full $1000 credit per child. 
    2. Credit is greater of 15% of earned income in excess of $3000 or excess of Social Security taxes over taxpayer's EITC. 
    3. See topic section of this article for basic Child Tax Credit rules. 
    4. With 1 or 2 children, the credit is also refundable to up to 15% of the amount that earned income exceeds $3,000.
      1. Tax free combat pay is treated as earned income in figuring refundable credit.
    5. With 3 or more children the credit is refundable up to extent of social security tax withheld.

    6. Tax credit phases out at higher income levels.

                Beginning phase out              Ending phase out
                                                        1 child       2 children     3 children
                  MFJ      $110,000         $129,001    $149,001     $169,001
                  Single    $75,000          $ 94,001     $114,001     $134,001
                  MFS      $55,000          $ 74,001      $ 94,001     $114,001

  4. American Opportunity Refundable Education Income Tax Credit Savings

    This entry carries automatically from form 8863.   See American Opportunity Credit in top section of this article.

  5. Amount Paid with Extension Income Tax Credit

    1. Extensions do not delay the paying of tax as most people think.
    2. With extensions, you estimate what will be owed and then send in at least 90% to avoid penalties.
    3. An automatic 6 month extension is granted by using Form 4868.
    4. Do not have to file State extension if filing federal extension except if have to send in payment. If not filing federal, file state.  State sometimes penalizes for filing late as don't have federal extension in their records.  Need to fax copy of federal extension and ask them to take off penalty.
    5. US citizens living outside the country (not visiting, though) have an automatic 2 month extension.  Military stationed in a combat zone have 180 days after they get back.  Send statement with the return to state and federal.
    6. Can file extensions electronically

  6. Excess Social Security and Tier I RRTA Tax Withheld IncomeTax Credit Savings

           When the taxpayer works for two or more employers it is possible they could exceed the maximum amount of FICA.
    1.  Our  program will figure this automatically. 
    2.  FICA Rates
      1. 2014 FICA Employee is 6.20% of $117,000   ($7,254.00)  Medicare is 1.45% any amount.  No top limit.  Total 7.65%
      2. 2014 FICA Self-Employment is 12.4% of $117.000.  ($14,508.00)  Medicare is 2.9% any amount.  No top limit. Total 15.3%
      3. 2015 FICA Employee is 6.20% of $118,500 ($7,347) Medicare is 1.45% any amount. No top limit. Total 7.65%
      4. 2015 FICA Self Employed is 12.4% of $118,500 ($14,694) Medicare Self Employed is 2.9% any amount.  No top limit. Total 15.3%
    3. If the amount withheld from two employers exceeds this amount, our tax program should claim refund on back of 1040.   
    4. If you code a W-2 to the wrong spouse, it may give excess Social Security refund in error.
    5. When one employer held out too much in error, taxpayer must make the correction with the employer.
      1. If they won’t correct, taxpayer can claim if they claim refund on Form 843.
    6. On Sick pay, only the first 6 months is subject to FICA.  If held out longer than six months, it must be corrected with the employer.

  7.  Federal Fuel Income Tax Credit Savings:  Form 4136

    1. This Income Tax Credit is for federal tax paid on fuels used off road for farmers, some businesses.
    2. Must report as income the following year.
    3. Use form 4136 for figuring income tax credit savings.

  8. Notice to shareholder of undistributed long term capital gain income tax credit savings: Form 2439

    1. Enter tax paid by firm for the taxpayer.

  9. Health Coverage Income Tax Credit Savings: Form 8885 

    This credit expired at end of 2013.  
    1. Former employer should send employee a packet if they qualify.
    2. Must be eligible for trade adjustment assistance. (TRA)
    3. Former employee can't be receiving Cobra reimbursement.
    4. Former employee must have paid health insurance premium.
    5. Former employee must not have been covered by Medicare.
    6. Credit is a refundable credit.  Can get advance credit.
    7. Use form 8885.  Credit is 65% of eligible premiums.
  10. Income Tax Credit Savings for Repayment of Income over $3000  

    If taxpayer had to repay income of over $3000 for a prior year during the current year, they can take a credit as a margin entry on line marked IRC 1341.

    1. You often see this when someone retires on Social Security disability, receives a lump sum from SS and have to repay back disability received from employer.  Often good tax savings!!!
    2. You recomputed tax for the earlier year as if the income had not been reported.  Print out original return and modified return to send to IRS.  
    3. Do page showing how you determined credit.  The credit is the difference between the recomputed tax and the actual tax can be claimed as a tax credit. 
    4. Do not file electronically as IRS needs supporting paperwork.
      i.  IRS wants proof of repayment and to which year it applies.
      ii.  Include page telling how you computed credit. 
      iii.  Include copies of prior year returns supporting your computations.  Label each page with original or revised and year. 
      iv.  Include copy of IRC 1341 rules from Repayment rules from Publication 17.  Highlight section telling IRS what you are doing.  Their employees don’t know about IRC 1341.

  11. Prior Year Minimum Income Tax Credit Savings:  Form 8801

    1. If taxpayer has an unused minimum tax credit carried forward from 4 years back, you may be able to claim part of it on Form 8801.   Credit is the greater of 20% or $5000.  Phase out based on AGI and filing status.  

Net Premium Tax Credit

The purpose of Form 8962 is to reconcile the Marketplace subsidy with the actual credit the taxpayer qualified for.
A change in income, family size  or becoming eligible for other qualified plan, may cause taxpayer to repay part on line 46 of 1040 or they may receive additional refundable credit on line 69.

To claim the premium tax credit, taxpayer must have got insurance through the Marketplace. 

  • If received subsidy from Marketplace, must file tax return regardless of income to reconcile credit.
  • Must have form 1095A Health Ins. Marketplace to do return.  Can request 1095A if didn’t receive.
  • Taxpayer only able to claim credit for the months they were eligible to be enrolled in the Marketplace

Can’t claim credit if:  

  • MFS except if can file as HH or due to domestic violence
  • Can’t claim credit if taxpayer is a dependent of someone.

The Premium Assistance Credit helps low income taxpayers cover some of the cost of insurance. IRS says to claim the premium tax credit, you must get insurance through the Marketplace.  Also should report changes in income or family size to the marketplace. Credit is based on annual household income including social security, etc.

Can receive credit if household income is 

100% to 400% of poverty level.  
1 person $11,490 to  $45,960 .  
2 people $15,150 to  $62,040.  
3 people $19,530 to  $78,120
4 people $23,550 to  $94,200
5 people $27,570 to  $110,280

  • The subsidy has 6 brackets and increases significantly as income gets closer to poverty level.

  • Taxpayers under 100% of poverty are not eligible for subsidy.  Some may qualify for Indiana health care plan but Indiana hasn’t adopted expanded Medicare to cover people under poverty level.    

  • The subsidy is based on silver level and is paid directly to the insurance company.  Taxpayer can buy any level (bronze pays 60% of medical costs, silver pays 70%, gold pays 80%, platinum pays 90%)

  • verifies income taxpayer reports against prior year IRS and social security income records to determine subsidy.
  • If income changes, the amount of credit claimed on  return is compared to amount of subsidy to determine if taxpayer has to pay back part of subsidy (or gets more credit).  

  • A taxpayer is liable for any dependents who do not have medical insurance even if they do not claim dependent (unless they are exempt under rules in section D starting in previous column.)

Form 8962 Line by Line:


Relief Checkbox:  Check this box if filing MFS & a victim of domestic abuse or abandonment.

Line 1:  Family Size:  This is the number of exemptions from front of 1040.

Line 2A: Taxpayers Modified AGI = AGI + Tax Exempt Interest + Nontaxable SS + foreign earned income.

Line 2B: Dependents MAGI:  Include If dependents modified AGI > $6200 or $7750 65+ or over $1000 unearned income.     

Line 3:  Household Income: Total 2A & 2B

Line 4:  Federal Poverty Level:  Based on family size & area of country. 

Check box for other 48 states. 

Can receive credit if household income is 100 to 400% of poverty and had insurance through the Marketplace

Taxpayers under 100% of poverty or over 400% are not eligible except if in Marketplace & income went under 100%. 

Line 5: Household income as % of poverty level: Divide line 3 by line 4. Used in step 6.

Line 6:  If line 5 is > 400% of poverty have to repay subsidy except if just married-(see part 5).
Check 2nd box yes if line 5 is < 100% and taxpayer received Marketplace subsidy.

Line 7:  Applicable figure Is the % of insurance premium taxpayer has to pay. The taxpayer's annual contribution increases as income goes up. (subsidy decreases as income goes up.)

Below table explains if taxpayer has to repay        
Household Income            Taxpayer’s Contribution  % 
as % of Poverty Level         increases between         

100% to 133%             2.0% at 100%.....  to  3% at 133%
133% to 150%             3.0% at 133%.....  to  4% at 150%
150% to 200%             4.0% at 150%.....  to  6.3% at 200%
200% to 250%             6.3% at 200%.....  to 8.05% at 250%
250% to  300%             8.05% at 9.5% at 300%
300% to 400%             9.50% at 300%.... to  9.5% at 400%

Line 8a: Annual contribution: Line 3 X line 7. This is yearly premium taxpayer is to have paid.

Line 8b: Monthly contribution: 8a divided by 1

Line 9:  Must check box & allocate in Part 4 when:

  • Taxpayer covered thru Marketplace someone outside tax family.
  • Someone else covered thru Marketplace someone in taxpayer’s family.    
  • See right side of page for Allocation Situation Rules  

Line 10: Check box if form 1095A shows coverage for whole year and the same monthly premiums. If yes go to line 11.  If not go to line 12 where you have to enter monthly amounts from 1095A.  

Line 11a:  Total premium amount for the year from 1095A line 33A.

Line 11b:  2nd Lowest Cost of Silver Plan (SLCSP). 1095A line 33B (modify for changes not told to Marketplace.) 

Line 11c:  The Annual Contribution Taxpayer. Taxpayer is responsible for comes from line 8a

Line 11d: Annual Max. Premium Assistance. Subtract 11c from 11a

Line 11e:  Annual Premium Tax Credit Allowed. Smaller of 11a or 11d.  Carries to line 24.

Line 11f:  Annual Advance Payment Received. Enter from 1095A line 33C.  Carries to line 25.

Line 26:   Net Premium Tax Credit. If line 24>25 taxpayer gets additional refundable credit

Line 27: Excess Advance Payment. If line 25 > 24 taxpayer has to repay part or all of credit.

Line 28:  Repayment Limitation: Taxpayers < 400% poverty level have a cap on payback. It depends of poverty level and filing status.  See table below.
                                     Repayment Limitation
       Poverty Level       Single     Other Status
       <200%                     $  300       $  600
        200% to 299%        $  750       $1500
        300% to 399%        $1250       $2500

Line 29: Repayment of Excess Advanced Paymt: Enter smaller of 27 or 28.

Part 4: Must check box & allocate when:

Taxpayer covered through Marketplace someone outside tax family.
Someone else covered through Marketplace someone in taxpayer’s family.      

Allocation Situations: 

Taxpayer divorced in current year and someone in former spouse’s tax household was enrolled in the same Marketplace plan during year.
Allocate % of insurance for months they were married.  X/Spouses can allocate % they agree to.  If can’t agree must use 50%.  

  • In Part 4, enter % in e, f and g for former spouse and other info.
  • On 8962 lines 12 to 23 prorate columns A, B & E  for months married
  • IF still on same plan after divorce see 3, 4, or 5 below.

Taxpayers married filing MFS or HH and someone in former spouse’s tax household was enrolled in the same Marketplace plan.
MFS can’t claim Credit.  Must repay credit subject to limitation ( line 29) Married who qualify HH or if domestic abuse or abandonment can claim. 

  • In Part 4 lines  e & g enter 50% for former spouse & other info.  Leave f blank.   
  • On 8962 lines 12 to 23 columns A & F prorate monthly figures 50% for months other party was covered  
  • In column B see Pub 974 to recompute SLCSP premium for new family size.  

Marketplace policy shared with an individual for whom another taxpayer claims a personal exemption. Taxpayer claiming the exemption may be able to take credit for that individual.

  • In Part 4, enter info. & % allocated to other taxpayer for individual .

a. You and other taxpayer can agree any allocation %.

b. If cannot agree, the allocation % is equal to # of people on plan claimed by other party divided by # of people covered in the plan.  

  • At lines 12 to 23, prorate monthly figures taking this% into account.
  • If dependent not claimed you must report their share of advanced credit.

You claim the exemption for person another taxpayer covers in Marketplace

  •  In Part 4, enter info. and % allocated (as in 3a above) from taxpayer (& their SS#) for the individual you claim.

a. Need other taxpayer’s 1095A to determine the % of monthly amounts that will be added to taxpayers totals at lines 12 to 23. 

Policy shared with 2 or more families:

  • If more than 1 family in plan, you allocate between families 
  • Each can claim the credit on their portion of premium paid.
  • Determine the applicable SLCSP premium for each family (FROM THE MARKETPLACE) and then prorate the premium and advance credit according to each share of SLCSP premium.  
  • On lines 30 to 33 leave column f (SLCSP) blank.     

Part 5  Alternative Calculation for Year of Marriage.  Complicated

To qualify to use alternative calculation must meet following requirements.


  • Must be married on Dec. 31st and be filing a joint return.
  • Must be unmarried at beginning of current tax year.
  • Someone in tax family was enrolled in Marketplace before marriage.
  • Someone in tax family received advanced credit.
  • Do Alternative Calculation for Marriage Eligibility worksheet to verify they received excess advanced credit.
  • For calculation see instructions in Pub. 974. 



Give us a call if you have questions or we can be of help, 765-452-8000.  Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.