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.)
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.
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)
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.
15. Plug-in Electric Drive Vehicle Income Tax Credit Savings:
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
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.
Earned Income Tax Credit With Children Savings Requirements:
- 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.
- 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.
- If child qualifies as qualifying child for more than 1 taxpayer:
- 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.
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.
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
- 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
- Earned income includes wages, sick pay, salaries, tips, disability pensions & income or loss from a business.
- 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)
- Unemployment is not earned income.
- Where there is a noncustodial parent
- If Noncustodial parent meets the following requirements they can claim the dependent and the Child Tax Credit (NOT EIC).
- (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.
- The Custodial parent, if they qualify, can claim Head of Household, Dependent Care and EIC.
- EIC is a refundable credit. Refundable means they can receive a refund for the credit even if there is no tax to offset against.
- Double check child's year of birth, last name & Social Security # closely as IRS verifies against Social Security records.
- 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)
- If information is correct, taxpayer will need to check with Social Security Administration to get Social Securty records corrected.
- 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.
- Can be denied for 2 years where claimed in disregard of tax law.
- Can be denied up to 10 years for fraud.
- Do not include income from work performed while an inmate in a penal institution.
- 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.
- 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.
- For business, copy & note proof of business activity.
Earned Income Tax Credit Without Children Savings
- AGI must be under $20,020 MFJ or $14,590 other than MFJ. Maximum credit is $496.
- Taxpayer or spouse is age 25 to 64 at year’s end.
- Are not a dependent or qualifying child of another.
- Must be a resident of the US for over ½ the year.
- If married and filing a joint return you generally cannot be qualifying child of another.
Additional Child Income Tax Credit Savings
- This credit is for taxpayers whose income tax was too low to get full $1000 credit per child.
- Credit is greater of 15% of earned income in excess of $3000 or excess of Social Security taxes over taxpayer's EITC.
- See topic section of this article for basic Child Tax Credit rules.
- With 1 or 2 children, the credit is also refundable to up to 15% of the amount that earned income exceeds $3,000.
- Tax free combat pay is treated as earned income in figuring refundable credit.
- With 3 or more children the credit is refundable up to extent of social security tax withheld.
- 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
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.
Amount Paid with Extension Income Tax Credit
- Extensions do not delay the paying of tax as most people think.
- With extensions, you estimate what will be owed and then send in at least 90% to avoid penalties.
- An automatic 6 month extension is granted by using Form 4868.
- 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.
- 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.
- Can file extensions electronically
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.
- Our program will figure this automatically.
- FICA Rates
- 2014 FICA Employee is 6.20% of $117,000 ($7,254.00) Medicare is 1.45% any amount. No top limit. Total 7.65%
- 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%
- 2015 FICA Employee is 6.20% of $118,500 ($7,347) Medicare is 1.45% any amount. No top limit. Total 7.65%
- 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%
- If the amount withheld from two employers exceeds this amount, our tax program should claim refund on back of 1040.
- If you code a W-2 to the wrong spouse, it may give excess Social Security refund in error.
- When one employer held out too much in error, taxpayer must make the correction with the employer.
- If they won’t correct, taxpayer can claim if they claim refund on Form 843.
- 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.
Federal Fuel Income Tax Credit Savings: Form 4136
- This Income Tax Credit is for federal tax paid on fuels used off road for farmers, some businesses.
- Must report as income the following year.
- Use form 4136 for figuring income tax credit savings.
Notice to shareholder of undistributed long term capital gain income tax credit savings: Form 2439
- Enter tax paid by firm for the taxpayer.
Health Coverage Income Tax Credit Savings: Form 8885
This credit expired at end of 2013.
- Former employer should send employee a packet if they qualify.
- Must be eligible for trade adjustment assistance. (TRA)
- Former employee can't be receiving Cobra reimbursement.
- Former employee must have paid health insurance premium.
- Former employee must not have been covered by Medicare.
- Credit is a refundable credit. Can get advance credit.
- Use form 8885. Credit is 65% of eligible premiums.
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.
- 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!!!
- 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.
- 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.
- 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.
Prior Year Minimum Income Tax Credit Savings: Form 8801
- 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%)
- Healthcare.gov 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 250%....to 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.
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.
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.