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Commonly Overlooked Credits

Adoption Credit
You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child (including a child with special needs). The adoption credit is an amount subtracted from your tax liability. Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit on the current year return. The adoption credit is not available for any reimbursed expense. In addition to the credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

For both the credit or the exclusion, qualifying expenses include 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 for which the principal purpose is the legal adoption of an eligible child. An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final. An eligible child is also a child with special needs if he or she is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided. Under certain circumstances, the amount of your qualified adoption expenses may be increased if you adopted an eligible child with special needs.

The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.

Generally, if you are married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.


Child and Dependent Care Credit
If you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both you and your spouse must have earned income, unless one spouse was either a full–time student or was physically or mentally incapable of self–care.

The credit is a percentage, based on your adjusted gross income, of the amount of work–related child and dependent care expenses you paid to a care provider. There is a maximum dollar limit of dependent care expenses you can use for this credit. The amount of the maximum dollar limit depends on the taxable year and the number of qualifying children. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax.


Child Tax Credit

This credit is for people who have a qualifying child. It can be claimed in addition to the Credit for Child and Dependent Care expenses.

A qualifying child for this credit is someone who meets the following criteria:

  • Age - Was under age 17 at the end of the year;
  • Relationship - Is your son, daughter, adopted child, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals;
  • Citizenship - Is a U.S. citizen, U.S. national or resident of the U.S.;
  • Support - Did not provide over half of his or her own support, and
  • Lived with you - Must have lived with you for more than half of the (note that some exceptions to this criteria exist)

The credit is limited if your modified adjusted gross income is above a certain amount. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.


Additional Child Tax Credit

This credit is for certain individuals who get less than the full amount of the child tax credit. The additional credit may give you a refund even if you do not owe any tax.


Earned Income Credit

The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return.

The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.

Find out if you are eligible for the Earned Income Tax Credit (EITC) by answering some questions and providing basic income information using the EITC Assistant


Hope and Lifetime Learning Credits

This credit is a nonrefundable tax credit with a dollar limit per family that is available for qualified tuition and related expenses of higher education whether the student is at the undergraduate or graduate level. The Lifetime Learning Credit is calculated by taking a percentage of the qualified educational expenses paid.

Generally, you can claim the Lifetime Learning Credit if all three of the following requirements are met.

  1. You pay qualified tuition and related expensesof higher education.
  2. You pay these the tuition and related expenses for an eligible student.
  3. The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return.

The Lifetime Learning Credit is based on qualified tuition and related expenses you pay for yourself, your spouse, or a dependent for whom you can claim an exemption on your tax return.

As with the Hope Credit, generally, the Lifetime Learning Credit is allowed for qualified tuition and related expenses paid in the tax year for an academic period beginning in that year or in the first 3 months of the following year. For purposes of the Lifetime Learning Credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution to acquire or improve job skills

In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution, including accredited, public, nonprofit, and proprietary (privately-owned, profit-making) postsecondary institutions. Additionally, in order to be an eligible educational institution, the school must be eligible to participate in a student aid program administered by the Department of Education. The educational institution should be able to tell you if it is an eligible educational institution.

You cannot claim the Lifetime Learning Credit if any of the following apply.

1. your filing status is married filing separately;
2. you are listed as a dependent in the Exemptions section on another person's tax return (such as your parent's);
3. your modified adjusted gross income is above a specified amount;
4. you (or your spouse) were a nonresident alien for any part of the tax year and the nonresident alien did not elect to be treated as a resident for tax purposes;
5. you claim the Hope Credit for the same student in same year.


Credit for Excess Social Security Tax or Railroad Retirement Tax (RRTA) Withheld

Most employers must withhold social security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax. If you worked for two or more employers in a given year, you may have had too much social security or tier 1 RRTA tax withheld from your pay. You can claim the excess social security or tier 1 RRTA tax as a credit against your income tax.


Alternative Motor Vehicle Credit

The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.

The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit. Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit.



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