Adoption
credit. The
maximum adoption credit
increases to $10,390. See
Adoption Credit,
later for more information.
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).
Nonrefundable credits.
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.
Refundable
credits.
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:
Publication
502
Medical and Dental
Expenses
514
Foreign Tax Credit for
Individuals
530
Tax Information for
First-Time Homeowners
535
Business Expenses
590
Individual Retirement
Arrangements (IRAs)
968
Tax Benefits for
Adoption
Form
(and Instructions)
1116
Foreign Tax Credit
(Individual, Estate, or
Trust)
2439
Notice to Shareholder of
Undistributed Long-Term
Capital Gains
8396
Mortgage Interest Credit
8801
Credit For Prior Year
Minimum Tax —
Individuals, Estates,
and Trusts
8828
Recapture of Federal
Mortgage Subsidy
8834
Qualified Electric
Vehicle Credit
8839
Qualified Adoption
Expenses
8880
Credit for Qualified
Retirement Savings
Contributions
8885
Health Coverage Tax
Credit
Nonrefundable
Credits
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.
Adoption
Credit
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).
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.
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.
Eligible child.
The term “eligible
child” means any
individual:
Under 18
years old, or
Physically
or mentally
incapable of
caring for
himself or
herself.
Child with special
needs.
An eligible child is a
child with special needs
if all three of the
following apply.
He or she is
a citizen or
resident of the
United States
(including U.S.
possessions).
A state
(including the
District of
Columbia)
determines that
the child cannot
or should not be
returned to his
or her parents'
home.
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:
The
child's
ethnic
background,
The
child's
age,
Whether
the
child is
a member
of a
minority
or
sibling
group,
or
Whether
the
child
has a
medical
condition
or
physical,
mental,
or
emotional
handicap.
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.
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.
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.
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.
Foreign earned
income exclusion.
Foreign housing
exclusion.
Possession
exclusion.
Extraterritorial
income exclusion.
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.
How to
claim the credit.
Complete Form 1116 and
attach it to your Form
1040. Enter the credit
on Form 1040, line 46.
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.
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).
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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).
You were born
after January 1,
1987.
You are claimed
as a dependent on
another person's
2004 tax return.
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.
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.
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.
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.
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).
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.
Credit for
Prior Year
Minimum Tax
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.
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.
Qualified
Electric Vehicle
Credit
You may be allowed a tax
credit if you placed a
qualified electric vehicle
in service during the year.
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.
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.
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.
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.
Refundable Credits
The following credits are
refundable and are treated as
payments of tax.
Credit for excess
social security tax or
railroad retirement tax
withheld.
Credit for tax on
undistributed capital
gain.
Health coverage tax
credit.
Credit for
Excess Social
Security Tax or
Railroad
Retirement Tax
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 2004, you
may have had too much social
security or RRTA tax
withheld from your pay. You
can claim the excess social
security or RRTA tier 1 tax
as a credit against your
income tax. The following
table shows the maximum
amount of wages subject to
tax and the maximum amount
of tax that should have been
withheld in 2004.
Type of tax
Maximum
wages subject to
tax
Maximum tax
that should
have been withheld
Social security
or
RRTA tier 1
$87,900
$5,449.80
RRTA tier 2
$65,100
$3,189.90
All wages are subject
to Medicare tax withholding.
Use Form 843, Claim for
Refund and Request for
Abatement, to claim a refund
of excess RRTA tier 2 tax.
See Publication 505, Tax
Withholding and Estimated
Tax, for details.
One
employer.
If any one employer
withheld social security
or RRTA tax that
exceeded the amounts in
the preceding table, you
cannot claim the extra
amount withheld by that
employer as a credit
against your income tax.
Your employer must
adjust this for you.
Joint
return.
If you are filing a
joint return, you cannot
add the social security
or RRTA tax withheld
from your spouse's wages
to the amount withheld
from your wages. Figure
the credit separately
for you and your spouse
to determine if either
of you has excess
withholding.
How to
figure the credit if you
did not work for a
railroad.
If you did not work
for a railroad during
2004, figure the credit
as follows:
1.
Add all
social
security tax
withheld
(but not
more than
$5,449.80
for each
employer).
Enter the
total
here
2.
Enter any
uncollected
social
security tax
on tips or
group-term
life
insurance
included in
the total on
Form 1040,
line 62
3.
Add lines 1
and 2. If
$5,449.80 or
less, stop
here. You
cannot claim
the credit
4.
Social
security tax
limit
5,449.80
5.
Credit.
Subtract
line 4 from
line 3.
Enter the
result here
and on Form
1040, line
66 (or Form
1040A, line
43)
Example.
You are married
and file a joint
return with your
spouse who had no
gross income in
2004. During 2004,
you worked for the
Brown Shoe Company
and earned $52,000
in wages. Social
security tax of
$3,224 was withheld.
You also worked for
another employer in
2004 and earned
$40,200 in wages.
$2,492.40 of social
security tax was
withheld from these
wages. Because you
worked for more than
one employer and
your total wages
were more than
$87,900, you can
claim a credit of
$266.60 for the
excess social
security tax
withheld.
1.
Add all
social
security
tax
withheld
(but not
more
than
$5,449.80
for each
employer).
Enter
the
total
here
$5,716.40
2.
Enter
any
uncollected
social
security
tax on
tips or
group-term
life
insurance
included
in the
total on
Form
1040,
line 62
-0-
3.
Add
lines 1
and 2.
If
$5,449.80
or less,
stop
here.
You
cannot
claim
the
credit
5,716.40
4.
Social
security
tax
limit
5,449.80
5.
Credit.
Subtract
line 4
from
line 3.
Enter
the
result
here and
on Form
1040,
line 66
(or Form
1040A,
line 43)
$266.60
How to
figure the credit if you
worked for a railroad.
If you were a railroad
employee during 2004,
figure the credit as
follows:
1.
Add all
social
security and
tier 1 RRTA
tax withheld
(but not
more than
$5,449.80
for each
employer).
Enter the
total here
2.
Enter any
uncollected
social
security and
tier 1 RRTA
tax on
tips or
group-term
life
insurance
included in
the total on
Form 1040,
line 62
3.
Add lines 1
and 2. If
$5,449.80 or
less, stop
here. You
cannot claim
the credit
4.
Social
security and
tier 1 RRTA
tax limit
5,449.80
5.
Credit.
Subtract
line 4 from
line 3.
Enter the
result here
and on Form
1040, line
66 (or Form
1040A, line
43)
How to
claim the credit.
Enter the credit on
Form 1040, line 66. You
cannot claim the credit
on Form 1040A or Form
1040EZ.
Credit for
Tax on
Undistributed
Capital Gain
You must include in your
income any amounts that
regulated investment
companies (commonly called
mutual funds) or real estate
investment trusts (REITs)
allocated to you as capital
gain distributions, even if
you did not actually receive
them. If the mutual fund or
REIT paid a tax on the
capital gain, you are
allowed a credit for the tax
since it is considered paid
by you. The mutual fund or
REIT will send you Form
2439, Notice to Shareholder of
Undistributed Long-Term
Capital Gains,
showing the undistributed
capital gains and the tax
paid, if any. Claim the
credit for the tax paid by
entering the amount on line
69, Form 1040, and checking
box a. Attach Copy B of Form
2439 to your return. See
Capital Gain Distributions
in chapter 9 for
more information on
undistributed capital gains.
Health
Coverage Tax
Credit
There is a health
coverage tax credit
available to certain
individuals who receive a
pension benefit from the
Pension Benefit Guaranty
Corporation (PBGC) or are
eligible to receive certain
Trade Adjustment Assistance
(TAA) or who are eligible
for the Alternate Trade
Adjustment Assistance (ATAA)
program. You qualify for
this credit if you:
Are an eligible
individual,
Pay for
qualified health
insurance covering
an eligible coverage
month for yourself
or for yourself and
qualifying family
members,
Do not have
other specified
coverage, and
Are not in
prison.
You qualify for this
credit on a month-by-month
basis. If you qualify, you
can claim a credit equal to
65% of the premiums you pay
for qualified health
insurance.
You can either take this
credit on your tax return or
have it paid on your behalf
in advance to your insurance
company. Your payments and
any payments paid on your
behalf in advance are
treated as having been made
on the first day of the
month for which they are
made. If the credit is paid
on your behalf in advance,
that amount will reduce the
amount of the credit you can
claim on your tax return. If
you received National
Emergency Grant (NEG)
payments during 2004 for
qualified health insurance,
that amount will also reduce
the amount of the credit you
can claim.
You are not entitled
to the credit for a month,
if on the first day of that
month, you are either:
Covered by
Medicare, or
Covered by a
group health plan
available through
your or your
spouse's employer if
the employer
contributes 50% or
more of the premium.
For a definition of an
eligible individual, see the
following discussion. For
definitions of the terms in
(2) and (3) earlier,
including qualified health
insurance and other
specified coverage, see
Publication 502.
Eligible
Individual
You are an eligible
individual for any month
during which one of the
following is true.
You receive
a TAA for
individuals
under the Trade
Act of 1974 for
at least one day
in the month.
You would
receive a TAA
but do not
because you have
not yet
exhausted your
unemployment
benefits, and
are covered
under a TAA
certification.
You are a
worker receiving
a supplemental
wage allowance
under section
246 of the Trade
Act of 1974 for
such month.
You are at
least 55 years
old as of the
first day of the
month and are
receiving
pension benefits
from the PBGC.
Once you qualify
under (1) or (2) above,
you remain eligible for
the first month that you
otherwise cease to be
eligible.
Example.
You receive a TAA
for individuals
during May, but do
not receive another
for the rest of the
year. You are
eligible for the
health coverage tax
credit for both May
and June.
You are not an
eligible individual
if an exemption can
be claimed for you
on another person's
tax return.
ATAA workers.
If you are
eligible for the
Alternative Trade
Adjustment
Assistance (ATAA)
program, you are
eligible for this
credit for a period
not to exceed two
years if you:
Are
covered by a
qualifying
certification,
Are
reemployed
not more
than 26
weeks after
the date of
separation
from the
adversely-affected
employment,
Are at
least 50
years of
age,
Do not
earn more
than $50,000
a year in
wages from
reemployment,
Are
employed on
a full-time
basis, and
Do not
return to
the
employment
from which
you were
separated.
How To Claim
the Credit
To claim the credit,
complete Form 8885 and
attach it to your Form
1040. Include your
credit in the total for
Form 1040, line 69, and
check box c. You cannot
claim the credit on Form
1040A or Form 1040EZ.
You must attach
invoices and proof of
payment for any amounts
you include on line 2 of
Form 8885 for which you
did not receive an
advance payment. For
details, see Publication
502 or Form 8885.
