CREDITS

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• AFFORDABLE CARE ACTS
• INCOME
• WITHHOLDING
• DEPENDENTS
• CREDITS
• DEDUCTIONS
• PAYMENTS
• IRS TAX CALENDAR
• TAX TIPS

Tax Credits

A tax credit reduces the amount of tax for which you are liable. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces your tax liability.

A tax credit is usually more valuable than a tax deduction of the same dollar amount. There are two categories of tax credits, refundable and nonrefundable.

Nonrefundable Tax Credits

Most, but not all, tax credits are referred to as nonrefundable credits. A nonrefundable credit can reduce your tax liability to zero (0), but not below. You must have tax liability on line 46 of Form 1040, line 18 of Form 1040A, or line 43 of Form 1040NR to claim a nonrefundable tax credit.

Nonrefundable tax credits include:

• Child and Dependent Care Credit
• Education credits (American Opportunity Credit is also partly refundable)
• Credit for the Elderly or Disabled
• Child Tax Credit
• Foreign Income Tax Credit
• Residential Energy Credits
• Retirement Savings Contribution Credit
• First-Time Homebuyer Credit for a home bought in 2008

Refundable Tax Credits

A refundable tax credit is a tax credit that can reduce your tax liability below zero (0). Because it is possible to receive a tax refund from this type of credit, they’re referred to as refundable. The easiest way to get your tax refund is to do your taxes online.

Refundable tax credits include:

• Earned Income Credit
• Adoption Credit (beginning in 2012, no longer refundable)
• Excess Social Security Credit
• Additional Child Tax Credit
• Health Coverage Tax Credit
• American Opportunity Credit – partly refundable

Earned Income Credit

The Earned Income Tax Credit (EIC) is a refundable tax credit that reduces or eliminates the tax paid by low-income workers.

Amount of Credit

Tax year 2012 maximum credit:

• $5,891 with three or more qualifying children
• $5,236 with two qualifying children
• $3,169 with one qualifying child
• $475 with no qualifying children

Requirements to Claim Credit

• You must have a valid Social Security Number (SSN).
  • An Individual Taxpayer Identification Number (ITIN) is not sufficient.
  • Your SSN card must not have “Not valid for employment” on it.
• Your filing status must be single, head of household, qualifying widow(er), or married filing jointly.
• You must be a U.S. citizen living in the U.S. more than half the year, or a resident alien for the entire year.
• You cannot have foreign earned income.
• You must have less than $3,200 in “disqualifying” income, which includes investment, rent, and royalty income.
• Your adjusted gross income falls within certain levels, which vary by filing status and the number of qualifying children:
  • Single, head of household, qualifying widow(er) filers:
    • Three or more qualifying children: the credit begins to phase out when income reaches $17,100 and is eliminated when it reaches $45,060.
    • Two qualifying children: the credit begins to phase out when income reaches $17,100 and is eliminated when it reaches $41,952.
    • One qualifying child: the credit begins to phase out when income reaches $17,100 and is eliminated when it reaches $36,920.
    • No qualifying children: the credit begins to phase out when income reaches $7,800 and is eliminated when it reaches $13,980.
    • Married filing jointly filers:
      • Three or more qualifying children: the credit begins to phase out when income reaches $22,300 and is eliminated when it reaches $50,270.
      • Two qualifying children: the credit begins to phase out when income reaches $22,300 and is eliminated when it reaches $47,162.
      • One qualifying child: the credit begins to phase out when income reaches $22,300 and is eliminated when it reaches $42,130.
      • No qualifying children: the credit begins to phase out when income reaches $13,000 and is eliminated when it reaches $19,190.
• You must have earned income.
• You must not be the qualifying child of another person.
• You must not be the dependent of another person.
• You must be at least age 25, but under age 65.

Additional Requirements if You Have a Qualifying Child

• The child must have a valid Social Security Number (SSN).
• The child must be younger than you, unless the child is disabled.
• The child must not have filed a joint return except to claim a refund.
• The child’s relationship to you must be any of the following:
  • Son or daughter
  • Stepchild
  • Eligible foster child
  • Sibling, half-sibling, or step-sibling
  • A descendant of any of the above, e.g, your grandchild
• The child must be one of the following:
  • Under 19 at the end of the current tax year
  • Under 24 at the end of the current tax year and a student
  • Permanently and totally disabled at anytime during the year, regardless of age
• The child must have lived with you in the United States for more than half of the current tax year. A child is considered to have lived with you if the child was born or died in the current tax year and lived with you the entire time he or she was alive. Temporary absences, including school, vacation, medical care, military service, or detention in a juvenile facility, count as time lived with you.
• The child cannot be used by anyone else to claim EIC.
• It is possible that one child might be claimed by two or more persons in one calendar year. In this event, the child will be the qualifying child of the parents first, and then the taxpayer with the highest adjusted gross income (AGI). If both of the child’s parents claim the credit, the parent with whom the child resides the longest may claim the credit. If the child resides with both parents an equal amount of time, the parent with the highest AGI will claim the child for EIC.

Earned Income

• Wages
• Salaries
• Tips
• Other taxable employee compensation
• Net earnings from self-employment
• Disability pay reported as wages
• Parsonage allowances
• Meals and lodging furnished for the convenience of the employer
• Voluntary salary deferrals
• Military pay earned in a combat zone
• Strike pay paid by a union
• Statutory employee wages

Disallowance of EIC

Disallowance of EIC is usually due to math or clerical errors, reckless or intentional disregard of EIC rules, and fraud. If you have been disallowed for any reason other than a math or clerical error, you must file Form 8862 before claiming EIC again.

If you have been disallowed due to math or clerical errors for any year after 1996, it is not necessary to file Form 8862 with your tax return.

If you have been disallowed due to reckless or intentional disregard of EIC rules, you cannot claim EIC for two years after disallowance. If your EIC has not been reduced or disallowed again for any reason other than math or clerical errors, and you have previously filed Form 8862 since disallowance, you do not need to file Form 8862 again.

If you have been disallowed due to fraud, you cannot claim EIC for 10 years after final determination that your EIC claim was due to fraud.

For more assistance determining whether you are eligible for the Earned Income Tax Credit, use the IRS EITC Home Page.

For more information see IRS Publication 596.

Child and Dependent Care Credit

The Child and Dependent Care Credit is a nonrefundable tax credit based on expenses incurred for the care of a qualifying person. This care must make it possible for you to work or to seek employment. This credit is based on a percentage of the amount actually paid for care expenses.

Requirements to Claim Credit

• You and your spouse, if married, must have earned income during the year.
• You pay the care expenses so you and your spouse, if married, can work or seek employment.
• You make the care payments to someone you cannot claim as a dependent, and who is not your spouse or a parent of the child.
• Your filing status is single, head of household, qualifying widow(er) with dependent child, or married filing jointly.
• You are able to identify the person providing the child or dependent care.

Qualifying Expenses

Qualifying expenses are incurred for the well-being and protection of a qualifying person. The expenses must be to provide care for a qualifying person and must be work-related. Work-related care expenses are defined as expenses incurred for the care of the qualifying person while you are working or looking for work.

If you are married, both you and your spouse must work or look for work.  For more information see Earned Income.

Qualifying expenses include:

• Household services, including babysitting, nursery, housekeeping, and other services that are ordinary and usual if they are at least partly for the care of a qualifying person
• Expenses related to sending a child to an educational program, if the child is below first grade. Educational programs include nursery school, preschool, or similar programs.
• Payments to relatives who are not your dependent and are over the age of 19, not your spouse, and are not the parent of the qualifying person, and the qualifying person is under age 13. Even if the person providing the care is living with you, the expenses qualify if the above requirements are met.

Non-Qualifying Expenses

• The cost of transporting the qualifying person from your home to the care location and back.
• The cost of sending the qualifying person to overnight camp.
• Expenses related to food, clothing, education, and entertainment. However, if these expenses are small amounts and cannot be separated from the cost of caring for the qualifying person, these expenses may be included.

Qualifying Person

• A dependent is a person, other than you or your spouse, for whom you claim an exemption and who is a qualifying child or qualifying relative.
• The qualifying person must be under the age 13 on December 31, 2012, or disabled (any age).
• A person who cannot dress, clean, or feed themselves due to mental or physical problems, or a person who must have constant attention to prevent them from injuring themselves or others.
• The child or dependent for whom the credit is claimed must be identified by a taxpayer identification number. This number is generally a Social Security Number, but an Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number may be substituted.

Earned Income

For purposes of the Child and Dependent Care Credit, earned income includes:

• Wages
• Salaries
• Tips
• Other taxable employee compensation
• Net earnings from self-employment
• Disability pay reported as wages
• Parsonage allowances
• Meals and lodging furnished for the convenience of the employer
• Voluntary salary deferrals
• Military pay earned in a combat zone

A spouse is treated as having earned income for any month he or she is a full-time student or is physically or mentally unable to care for himself or herself.

A student is considered full time if they are enrolled and attend school for the number of hours or classes the school considers full time. You must have been a student for some part of five calendar months during the year. “School” includes elementary, junior and senior high schools, colleges, universities, technical, trade, and mechanic schools. Schools offering courses only through the Internet are not considered a “school” for this credit.

Provider Identification

All persons or organizations providing child or dependent care must be identifiable. In order to identify the care provider you must supply the provider’s name, address and taxpayer identification number.

If the provider is an individual, his or her Social Security Number or Individual Taxpayer Identification Number is acceptable.

If the provider is an organization, the Employer Identification Number (EIN) is acceptable.

If the provider is a tax-exempt organization (church, school, etc.), it is not necessary  to provide identification – you may enter “TAX-EXEMPT” in place of the identifying number on Form 2441.

If you cannot provide all of the information or the information is not correct, you must provide proof of due diligence. For the purpose of provider identification, due diligence can be shown by obtaining and keeping the provider’s completed Form W-10, a copy of the provider’s Social Security card, driver’s license (if it includes the Social Security Number), Form W-4 (if the person is a household employee), or a letter or invoice from the provider showing the necessary information.

If the provider refuses to supply you with identification information, you should report the information you can obtain at the bottom of the form you use to claim the credit (Form 2441). On the bottom of the second page of Form 2441, explain the information was requested but refused by the provider.

Limitations of Credit

Child and dependent care expenses are limited to $3,000 for one qualifying person, and $6,000 for two or more qualifying persons.

The total child and dependent care expenses claimed cannot exceed your total earned income for the year.

The credit is equal to 35% of the maximum qualifying child and dependent care expenses. This rate is reduced by 1% for each $2,000 your adjusted gross income exceeds $15,000, but is not reduced below 20%.

The total child and dependent care expenses claimed must be reduced by Dependent Care Benefits you received from your employer. Employer-provided Dependent Care Benefits are reported in box 10 on Form W-2.

To claim the credit, complete Form 2441 and attach the form to your Form 1040 or Form 1040A.

For more information see IRS Publication 503.

Child Tax Credit

The Child Tax Credit is a nonrefundable tax credit for people who have a qualifying child. The credit is limited to $1,000 per qualifying child.

Qualifying Child

For the Child Tax Credit, a qualifying child is a child, descendant, foster child, stepchild, sibling, step-sibling, or a descendant of any of these, and all of the following must be true:

• The child is a U.S. citizen, U.S. national, or resident of the U.S.
• The child is under the age of 17 at the end of the current tax year.
• The child provided less than half of his or her own support in the current tax year.
• The child lived with you for more than half of the current tax year.

A child is considered to have lived with you if the child was born or died in the current tax year and  lived with you the entire time he or she was alive. Temporary absences, including school, vacation, medical care, military service, or detention in a juvenile facility, count as time lived with you.

Earned Income

For this credit, earned income only includes taxable earned income and nontaxable combat pay. Earned income generally includes salaries, wages, tips, net earnings from self-employment and other employee pay that is taxable.

Limitations of Credit

• You must have tax liability on line 46 of Form 1040, line 28 of Form 1040A, or line 43 of Form 1040NR. If the amount of the credit is more than your tax liability, you must reduce the amount of the credit to no more than your tax liability.
• If your modified adjusted gross income (MAGI) exceeds $110,000 for married filing jointly, $75,000 for single, head of household, or qualifying widow(er), or $55,000 for married filing separately, the amount of the credit is reduced.

For more information see IRS Publication 972.

Additional Child Tax Credit

The Additional Child Tax Credit is a refundable tax credit for people who have a qualifying child and did not receive the full amount of the Child Tax Credit. Because this credit is refundable, it is possible to get a refund even if you do not have any tax liability.

In order to receive the Additional Child Tax Credit, you first must qualify for the Child Tax Credit. If the amount of your Child Tax Credit is limited by your income tax liability, you may be able to claim the Additional Child Tax Credit if your earned income is less than the limits for the year. The limits are:

• Married filing jointly – $110,000
• Single, head of household, or qualifying widow(er) – $75,000
• Married filing separately – $55,000

The Additional Child Tax Credit is equal to the lesser of the unallowed Child Tax Credit, or 15% of your earned income that is more than $3,000. Tax-exempt combat pay counts as earned income for calculating the Additional Child Tax Credit.

If your earned income is not more than $3,000 and you have three or more qualifying children, you may be able to claim the Additional Child Tax Credit up to the amount of Social Security taxes that you paid for the year. If you are eligible to receive the Earned Income Tax Credit, the maximum amount of Additional Child Tax Credit under this method is the total amount of Social Security taxes less the amount of the Earned Income Credit for which you are eligible.

The amount of the Additional Child Tax Credit is determined on Form 8812.

For more information see IRS Publication 972.

Education Credits

The American Opportunity and Lifetime Learning credits are available to individuals for out-of-pocket tuition expenses incurred by students pursuing college degrees, graduate degrees or vocational training.

The American Opportunity Credit covers four years of post-secondary education, adds required course materials to qualifying expenses, makes the credit available at higher income levels, and increases the amount of the credit.

The Lifetime Learning Credit is available to students attending a post-secondary educational program and who are not eligible to take the American Opportunity Credit. Either the American Opportunity Credit or the Lifetime Learning Credit can be claimed for each eligible student, but you cannot claim both in any year.

Each student can elect whether to claim the American Opportunity or Lifetime Learning Credit, based on the credit with the most tax benefit.

• The American Opportunity Credit is limited on a per-student basis.
• The Lifetime Learning Credit is limited on a per-household basis.

The tuition and fees deduction is also available to eligible students. Either one of these credits or the deduction, but not both, may be taken for any student in a year.

American Opportunity Credit

The American Opportunity Credit is worth up to $2,500 per student for four years of post-secondary education. The credit is 40% refundable, up to $1,000, so it can benefit even those with no tax liability.

For individual taxpayers, the American Opportunity Credit phases out if modified adjusted gross income is between $80,000 and $90,000. For married filing joint, the credit phases out if MAGI is between $160,000 and $180,000.

Eligibility

• You must have paid qualified education expenses for yourself, your spouse or your dependent.
• The student is completing the first four years of post-secondary education at a qualified educational institution.
• The student is attending school to obtain an undergraduate degree or other recognized education credential.
• The student is enrolled for at least half-time of one academic period that began in the tax year.
• The student has no felony drug convictions.

Determining the Amount of Credit

For each student, the amount of the credit equals the sum of:

• 100% of the first $2,000 of qualified expenses paid for the eligible student
• 25% of the next $2,000 of qualified expenses paid for the eligible student

The maximum credit that can be claimed is $2,500 per student per year.

For more information see IRS Publication 970.

Lifetime Learning Credit

The Lifetime Learning Credit provides a maximum non-refundable tax credit of $2,000 per year for all students attending an eligible educational institution in your household. The Lifetime Learning Credit may be limited by your income and amount of tax.

For individual taxpayers, the Lifetime Learning Credit phases out if 2012 MAGI is between $52,000 and $62,000. For married filing joint, the credit phases out if 2012 MAGI is between $104,000 and $124,000. These limits are significantly lower than the American Opportunity Credit.

Eligibility

• Any student enrolled in one or more courses at an eligible educational institution.
• There is no requirement to be seeking a degree or to be enrolled at least half-time.
• The institution can include nondegree programs to acquire or improve job skills.
• There is no limit on the number of years you can claim the credit.

Determining the Amount of Credit

• The amount of the Lifetime Learning Credit is 20% of the first $10,000 paid for eligible education expenses for all eligible students.
• The maximum amount of credit is $2,000 per household.
• The amount of the credit will be reduced or eliminated if you exceed certain income levels.

Requirements to Claim American Opportunity or Lifetime Learning Credit

• You paid qualified higher education expenses for an eligible student.
• The eligible student is you, your spouse or a dependent for whom you are claiming an exemption.
• The expenses were paid for the current tax year or the first three months of the succeeding tax year.
• Your filing status is single, head of household, qualifying widow(er) or married filing jointly.
• You cannot be claimed as a dependent on another person’s tax return.
• You can claim the American Opportunity Credit for each student (taxpayer, spouse or dependent) on your return, but only one Lifetime Learning Credit per return, regardless of the number of students on the return. In addition, you may claim either the American Opportunity Credit or the Lifetime Learning Credit, but not both, or you may claim the tuition and fees deduction.

Qualifying Expenses

• Expenses are for tuition and related expenses required for enrollment or attendance at an eligible educational institution.
• An eligible educational institution is a college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administrated by the Department of Education.
• Related expenses include student activity fees, expenses for course-related books, supplies, and equipment included in education expenses. These expenses must be paid to the institution as part of enrollment or attendance requirements. (Expenses for books and course-related supplies are treated differently by each credit; see the descriptions above for more information.)
• The expenses are not paid with a tax-free scholarship, fellowship, grant or through an employer-provided education assistance program. This includes Pell Grants and Veterans’ educational assistance.

Non-Qualifying Expenses

• Room and board
• Insurance
• Transportation
• Medical expenses
• Expenses related to sports, games, hobbies, and non-credit courses, unless the course is required as part of the degree program

American Opportunity vs. Lifetime Learning Credit

To claim either credit, complete Form 8863 and attach the form to your Form 1040 or Form 1040A.

For more information see IRS Publication 970.

Retirement Savings Credit

The credit for retirement savings contributions is a nonrefundable tax credit available to taxpayers who make eligible contributions to a qualified IRA, 401(K), or certain other retirement plans.

The amount of the credit is a percentage of your eligible contribution based on your filing status and modified adjusted gross income. The maximum amount of credit is $1,000 per taxpayer ($2,000 married filing jointly).

Requirements to Claim Credit

• You made contributions to a qualified retirement plan, deferred compensation plan, or IRA.
• You were born before January 2, 1993.
• You are not a full-time student for five or more months during the year.
• You were not claimed as a dependent on another return.

Eligible Contributions

• Contributions to traditional or Roth IRAs
• Elective salary deferral contributions
  • 401(k), including a SIMPLE 401(k)
  • Section 403(b) annuity
  • Any deferred compensation plan of a state or local government (Government 457 plan)
  • SIMPLE IRA
  • Salary reduction SEP
• Contributions to a section 501(c)(18) plan
• Voluntary after-tax contributions to a tax-qualified retirement plan or section 403(b) annuity

Contribution Reduction

If you received a distribution from any IRA, plan, or annuity that qualifies as an eligible contribution in the current tax year, previous two years, or before the due date of the current tax year filing period, you must reduce the amount of your eligible contribution by the amount of the distribution you received.

Distributions received by your spouse are treated as being received by you if your filing status is married filing jointly in the year the distribution was received and the year the contribution was made.

Credit and Income Limitations

The maximum amount of credit is 50% (per taxpayer) of the first $2,000 of eligible contributions.

The credit is gradually reduced as your modified adjusted gross income increases and is completely phased out when your modified adjusted gross income exceeds the following amounts in the 2012 tax year:

• $28,750 for single, qualified widow(er), or married filing separately filing statuses
• $43,125 for head of household filing status
• $57,500 for married filing jointly filing status

To claim the credit, complete Form 8880 and attach the form to your Form 1040 or Form 1040A.

For more information see IRS Publication 590.

Residential Energy Credits

The nonrefundable Residential Energy Credits are available for individuals who make energy-conscious improvements to the energy efficiency of their home. There are two credits:

• The Nonbusiness Energy Property Credit, claimed on Part 1 of Form 5695, is for physical improvements to the home building itself. This covers energy-efficient insulation, doors, windows, heaters, air conditioners and the like.
• The Residential Energy-Efficient Property Credit, claimed on Part 2 of Form 5695, is for investments in alternative energy, such as solar, wind, geothermal and fuel cells.

Part I – Nonbusiness Energy Property Credit

The credit has a lifetime limit of $500, of which only $200 can be for windows. Also, only 10% of eligible energy-saving home improvements installed during the tax year qualify for the credit, but are still subject to other stated maximums. There are also other limits for certain devices, listed below. Finally, the $500 credit limit is reduced by amounts you received for the credit in 2006-2011.

Requirements to Claim Credit

• Windows and doors must now meet Energy Star specifications.
• Woodstoves must have a thermal efficiency of at least 75%.
• Natural gas, propane or oil furnaces or hot water boilers must have an annual fuel utilization efficiency of at least 95.
• Each item must be installed in your primary home. A primary home is the home where you live most of the time, including a house, houseboat, mobile home, condominium, manufactured home, or cooperative apartment.
• The expenses must be paid or incurred in the current tax year.
• Purchases made with subsidized energy financing are no longer eligible for the credit.

Qualifying Items / Expenses

• Insulation material or systems to reduce heat loss or gain
• Exterior windows, including skylights ($200 maximum credit)
• Exterior doors
• Roofing designed to reduce heat gain
• Residential energy property, including labor costs for the on-site preparation, assembly or original installation of the property
  • Natural gas, propane or oil furnaces – $150 maximum credit
  • Hot-water boilers – $150 maximum credit
  • Main air circulating fans used in natural gas, propane or oil furnaces – $50 maximum credit
  • Electric heat pump water heaters – $300 maximum credit
  • Natural gas, propane or oil water heaters – $300 maximum credit
  • Electric heat pumps – $300 maximum credit
  • Geothermal heat pumps – $300 maximum credit
  • Central air conditioners – $300 maximum credit

Part II – Residential Energy-Efficient Property Credit

A credit is also available for investments in alternative energy for your home. The Residential Energy-Efficient Property Credit also equals 30% of qualifying improvement costs, with no dollar limit except for fuel cells. Installation is usually included.

Requirements to Claim Credit

Property and installation costs must be for use in your home located in the United States. Except for fuel cells, the home does not have to be your main home.

Qualifying Items

• Solar panels
• Solar water-heaters
• Wind turbines
• Geothermal heat pumps
• Fuel cells, with restrictions:
  • The fuel cell must be installed on your main home in the U.S.
  • The fuel cell must have a capacity of at least .5 kilowatt.
  • The credit cannot exceed $500 for each .5 kilowatt generated.

To claim the credit, complete Form 5695 and attach the form to your Form 1040 or Form 1040A.

For more information, see Energy Incentives in the Recovery Act.

Adoption Credit

The Adoption Credit is available for the amount of out-of pocket qualified adoption expenses, or to exclude employer-provided adoption benefits from income. The maximum credit for 2011 is $13,360. For adoptions finalized in 2010 or 2011, the credit is refundable, as is unused credit carried forward from years before 2010, even though the credit was nonrefundable in prior years. Starting with 2010, the credit can no longer be carried forward (see Credit Limitations below for more information).

Requirements to Claim Credit

• The qualifying child must be under age 18, or is physically or mentally incapable of self-care.
• You can claim the credit for any filing status, but if married filing separately, the following must be true:
  • You lived apart from your spouse during the last 6 months of the year.
  • The eligible child lived in your home for more than half of the current tax year.
  • You paid over half the cost of keeping your home.
  • You meet all other requirements.
• Your 2011 modified adjusted gross income (MAGI) must be less than $225,210. The same income limit applies to single and joint filers. See below for additional phase-out amounts.
• You are able to report the eligible child’s name, year of birth and identifying number.
• You meet at least one of these conditions:
  • The adoption expenses were paid in the prior tax year, but the adoption was not final that year.
  • The adoption expenses were paid in the current tax year and the adoption was final in or before the current tax year.
  • The adoption of a special needs child was final in the current tax year.
  • The adoption expenses were paid after 1996 and the child is a foreign eligible child whose adoption became final in the current tax year.
  • You carried unused Adoption Credit forward from a prior year. Note that credit carried forward is treated as refundable, even though the credit was nonrefundable in prior years (see Credit Limitations below for more information).
• You must provide documents substantiating the adoption. Depending on the type of adoption, acceptable documents include an adoption order or decree, an adoption certificate, or the child’s visa for entering the United States (for a foreign adoption). For domestic adoptions that are not final, or for adoptions of a special-needs child, different documents apply. See IRS Notice 2010-66 for more information.

Qualifying Expenses

Qualified adoption expenses include expenses that are reasonable and necessary in order to adopt the eligible child:

• Adoption fees
• Court costs
• Attorney fees
• Travel expenses while away from home
• Re-adoption expenses related to adoption of a foreign child

For the adoption of a special-needs child, the maximum credit is available, regardless of actual qualifying expenses.

Timing of Expenses and Credit

Most taxpayers claim the credit in the year their adoption is final. There are some allowable exceptions and requirements:

• For a domestic adoption, you may claim the credit for in a tax year before the adoption is final, but must wait to claim the credit until the next tax year.
• You may not claim the credit for a foreign adoption until the year the adoption is final. Expenses from previous years are treated as paid or incurred in the year the adoption is final.
• For both domestic and foreign adoptions, you can claim the credit against expenses incurred in years after the adoption is final. The credit is allowable for the tax year you incurred or paid the qualifying expenses.
• Expenses for an unsuccessful domestic adoption may be included with expenses for a successful later adoption, possibly increasing the credit.

Non-Qualifying Expenses

• Expenses in connection with surrogate parenting
• Expenses incurred to adopt the child of the taxpayer’s spouse
• Expenses reimbursed by your employer or other organization
• Expenses violating federal or state law

Eligible Child

• Any child under age 18. If the child turned 18 during the year, the child is considered eligible for the part of year they were under age 18.
• Any physically or mentally disabled person unable to self-care.

Employer Provided Benefits

If your employer provides an adoption assistance program you may be able to exclude from income the expenses paid on your behalf.

The expenses must be paid directly to you or a third party for qualified adoption expenses. Employer-provided adoption benefits may reduce your salary and are generally reported in Box 12 of your W2.

Income Limitations

The amount of the Adoption Credit begins to phase out when your 2011 modified adjusted gross income (MAGI) reaches $185,210, and is eliminated at $225,210. The same limits apply to all filers.

Credit Limitations

• The maximum amount of credit is $13,360.
• The credit may no longer be carried forward, as it was in previous years. For unused credits prior to 2010, you must file an amended 2010 return and claim the prior usused credit.
• Carryforward credits are not subject to MAGI limitations.

To take the credit or exclusion, complete Form 8839 and attach the form to your Form 1040 or Form 1040A.

Elderly or Disabled Credit

The Credit for the Elderly or Disabled is a nonrefundable tax credit that is available to qualifying individuals who are over the age 65 or who are disabled.

Requirements to Claim Credit

• You must be a U.S. citizen or resident alien.
• You were age 65 or older at the end of the current tax year, or
• You were under age 65 at the end of the current tax year, and
  • You retired on permanent and total disability.
  • You received taxable disability income for the current tax year.
  • You had not reached mandatory retirement age on January 1 of the current tax year.
  • You have a physician’s statement certifying that you were permanently and totally disabled at the time of retirement.

Qualifying Disability Income

• The income is paid under your employer’s accident, health, or pension plan.
• The income is included in your income as wages, or instead of wages, during the time you are absent from work due to permanent and total disability.

Non-Qualifying Disability Income

• Payments received from a plan that does not provide disability retirement.
• Lump-sum payments for accrued annual leave that you received when retiring on disability.
• Amounts that are received after reaching your employer’s mandatory retirement age, at which you would have retired if you had not become disabled.

Income Limitations

Income limitations are based on your filing status and whether both spouses qualify for the credit if married filing jointly.

• If your filing status is single, head of household, or qualifying widow(er) with dependent child, you must have adjusted gross income (AGI) of $17,499 or less and cannot have more than $4,999 in nontaxable Social Security and other nontaxable pension(s) combined.
• Married filing jointly filing status with both spouses qualifying for the credit must have AGI of $24,999 or less and cannot have more than $7,499 in nontaxable Social Security and other nontaxable pension(s) combined.
• Married filing jointly filing status with only one spouse qualifying for the credit must have AGI of $19,999 or less and cannot have more than $4,999 in nontaxable Social Security and other nontaxable pension(s) combined.
• Married filing separately filing status and did not live with spouse the entire year must have AGI of $12,499 or less and cannot have more than $3,749 in in nontaxable Social Security and other nontaxable pension(s) combined.

For more information see IRS Publication 524.

First-Time Homebuyer Credit

The First-Time Homebuyer Credit was for the purchase of a new main home during 2008, 2009 or 2010. When you purchased the home determined how much your credit was and whether you had to pay it back:

• First-time homebuyers who bought a new home in 2008 were eligible for a maximum credit of $7,500, which must be repaid over the next 15 years.
• First-time homebuyers who bought a new home in 2009 were eligible for a maximum credit of $8,000, which does not have to be repaid.
• Long-time residents who bought a new home after November 6, 2009 were eligible for a maximum credit of $6,500, which does not have to be repaid.
• First-time homebuyers and long-time residents who bought a new home in 2010 before May 1, 2010 were eligible for a maximum credit of $8,000 or $6,500, respectively, which does not have to be repaid.

Repaying the 2008 Credit

As noted above, if you got the credit for a home purchased in 2008, you have to repay the credit over the next 15 years. The IRS has an online payment tracking tool to check your credit repayments. You can use the tool to get account information, such as the total amount of your credit or your repayment amount.

Repaying the 2009 or 2010 Credit

If you received the credit for a home purchased in 2009 or 2010, you are required to repay the credit if the home ceases to be your main home within 36 months of the date of purchase. The repayment amount becomes due for the year the home ceases to be your principal residence.

You must repay the full credit when:

• You sell your main home to a related person or entity.
• Your home is destroyed, condemned or disposed of under threat of condemnation and you do not buy or build a new home within two years.
• You convert the entire home to a rental or business property.
• You convert the home to a vacation or second home.
• You no longer live in the home for at least half the year.

You may have to repay the full or a part of the credit when:

• You sell your main home to a non-related person or entity. You repay the amount of the credit up to the amount of your capital gain.
• You lose your home in a foreclosure.You must repay the credit only up to the amount of gain.

Repayment After a Divorce

If you transfer your main home to a spouse or former spouse in a divorce, the spouse who keeps the home is responsible for repayment of the entire credit if, during the 36-month period after the purchase of the home, the home ceases to be his or her main home.

For more information on repaying the credit, see the Instructions for Form 5405.

Health Coverage Credit

The Health Coverage Tax Credit (HCTC) is a federal tax credit administered by the IRS that pays for 72.5% of qualified health insurance premiums for eligible individuals. The HCTC can be claimed yearly on an individual’s federal income tax return, or on a monthly basis by enrolling in the monthly HCTC program.

Who is Eligible?

There are three requirements to be eligible to claim the Health Coverage Tax Credit. All three requirements must be met in order to be eligible.

Requirement 1

You must be one of the following:

• A Pension Benefit Guaranty Corporation (PBGC) payee who is 55 years old or older.
• An eligible Trade Adjustment Assistance (TAA), Alternative TAA (ATAA), or Reemployment TAA (RTAA) recipient. An eligible TAA recipient is defined as someone who receives a Trade Readjustment Allowance (TRA) or is in an approved break in training, or receives Unemployment Insurance (UI) in lieu of TRA, while otherwise eligible for TRA. TAA recipients also must meet eligibility deadlines for enrollment in TAA-approved training or receive a written waiver to maintain HCTC eligibility.
• A qualified family member of an individual who fell under one of the categories listed above at the time of Medicare enrollment, death or divorce.

Requirement 2

You and your family members must also meet the following general requirements in order to receive the tax credit:

• Be covered by a qualified health plan for which you pay more than 50% of the premiums
• Not be enrolled in Medicare Part A, B, or C; or you are enrolled in Medicare but only claiming premiums for your qualified family members
• Not be enrolled in Medicaid or the Children’s Health Insurance Program (CHIP)
• Not be enrolled in the Federal Employees Health Benefits Program (FEHBP)
• Not be enrolled in the U.S. military health system (TRICARE)
• Not be imprisoned under federal, state, or local authority
• In order to receive the HCTC, you cannot be claimed as a dependent on someone else’s federal income tax return and your qualified family members must be your spouse or a dependent on your federal income tax return.

Requirement 3

You must be enrolled in a qualified health plan. Qualified health plans include:

• COBRA – insurance that has been extended from your former job-based health coverage. (You cannot also be receiving the COBRA Premium Reduction, which pays 65% of COBRA premiums to eligible laid-off workers.)
• State-qualified health plan – approved by a state’s Department of Insurance as meeting the requirements for the Trade Act of 2002
• Spousal coverage – health insurance that is provided through your spouse’s employer. Your spouse must pay more than 50% of the cost for spousal coverage.
• A health plan purchased through a Voluntary Employees’ Beneficiary Association (VEBA) that was established through the bankruptcy of your former employer.
• Non-group / individual health plan – health insurance that is sold by a private health insurance company to one individual or family at a time. The plan must have been purchased through an insurance company, agent, or broker and must have started 30 days before you left the job that made you eligible for TAA, ATAA, RTAA or PBGC benefits.

Receiving the Health Coverage Credit

There are two ways to receive reimbursement under the Health Coverage Tax Credit:

• You can register to receive the HCTC as a monthly payment to your insurance plan, or
• You can claim the HCTC on your yearly tax return.

To claim the credit, complete Form 8885 and attach the form to your Form 1040 or Form 1040A.

For more information, see the IRS Health Coverage Tax Credit Overview