Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.
Note. This list is only for tax credits. For a more comprehensive tax checklist for individuals, go to our 2010 Individual Tax Return Checklist.
Credits are worth more than deductions because they directly offset taxes. For example, if you're in the 35% bracket, a $100 tax deduction will save you only $35 in taxes; in the 15% bracket you'll only save $15 in taxes. A $100 credit will save you $100 in taxes. Many credits can result in $1,000 or more in savings. Credits are generally more focused in tax benefit.
We've listed the most popular credits available to individual taxpayers on their 2009 return. There are many more that apply to businesses. And there's some overlap. We've also tried to give you the highlights of the credit--when it applies, amounts, and phaseout. Many of the credits phase out as your AGI (adjusted gross income) or MAGI (modified adjusted gross income) increases. Phaseouts vary from credit to credit. Some of the phaseout ranges are indexed for inflation; some are not. The checklist below is just that--a checklist to remind you of credits that may be available. If you think one applies, check further. The rules can be involved. Just because you paid a babysitter doesn't mean you can claim the child and dependent care credit. Another point. Some of the credits listed are applicable only for one or two years and are scheduled to expire.
Some credits are refundable--that is, the IRS will send you a check if the credit exceeds your liability. Usually, a credit will just offset your tax bill--any excess will be lost.
Finally, many states provide credits. Some are similar to the Federal ones (e.g., child care, education, etc.), some are unique to the state. Don't overlook them because they may be more valuable since a deduction is worth less at the state level.
Child and Dependent Care Credit. A credit with percentages varying from 35% to 20% (taxpayers with AGI over $43,000) applied to expenditures for care for dependents under the age of 13 (or disabled), that enable the taxpayer (or both taxpayers if married) to enable the taxpayer to be employed. Form 2441--Instructions
American Opportunity Tax Credit. This credit essentially replaces the Hope scholarship credit for tax years 2009 and 2010. The credit is equal to 100% of the first $2,000 of qualifying expenditures and 25% of the next $2,000. It applies to the first four years of postsecondary education. As much as 40% of the credit is refundable. The credit is per child, not per family. The credit phases out for modified AGI over $80,000 ($100,000 for married, joint). Form 8863--Instructions
Lifetime Learning Credit. Equal to 20% of the first $10,000 of qualifying expenditures. Maximum credit is $2,000 per family. More flexible education requirements than American Opportunity Tax Credit or Hope credit. Student need only be enrolled in one course at a qualified educational institution. Form 8863--Instructions
Child Tax Credit. Credit of $1,000 per qualifying child. Child must be under age of 17 by end of year. Phases out with modified adjusted gross income of $110,000 for married, joint and $75,000 for single taxpayers. Form 8812
Retirement Savings Contribution Credit. Also known as Credit for Elective Deferrals and IRA Contributions and Saver's Credit. Credit equal to a percent of elective deferrals and contributions to IRAs. Maximum credit is $1,000; phased out with AGI of $55,000 for married, joint and $27,500 for single. Taxpayer must be at least 18 years of age; rollover contributions do not qualify. Form 8880
Foreign Tax Credit. A credit for taxes paid on foreign income. For most taxpayers that means foreign taxes withheld on dividends and interest. See Form 1116 and the instructions for more details. Form 1116--Instructions
Nonbusiness Energy Property Credit. Credit for exterior doors, windows, insulation, heat pumps, furnaces, central air, water heaters, and qualified stoves that burn biomass fuels. The Credit is 30% of cost; total credit limited to $1,500. Form 5695
Residential Energy Efficient Property Credit. Credit for residential alternative energy equipment equal to 30% of cost of solar water heaters, solar electricity property, small wind energy and geothermal heat pumps. Form 5695
Credit for Federal Tax on Gasoline and Special Fuels. Credit for federal excise tax where taxed fuel is used off-highway such as farming, forestry, and certain other nontaxable purposes.
Health Insurance Costs Credit. For individuals receiving or eligible to receive trade adjustment assistance and retirees age 55 or older receiving benefits from the Pension and Benefit Guarantee Corporation.
Credit for Government Retirees. A $250 credit for government retirees who have not received a payment from the Federal government. Claim on Schedule M.
Earned Income Credit. Refundable credit for low income individuals. Based on taxpayer's earned income, qualifying children and maximum earnings. Schedule EIC
Excess Social Security Taxes Withheld. If you worked two or more jobs and your income subject to Social Security taxes exceed the limit, you may claim a credit for the excess taxes.
First-Time Homebuyer Credit. Credit up to $8,000 for taxpayers who purchase a first home or had no ownership interest in a home in the three prior years ending on date of home purchase. Credit phases out for taxpayers with AGI over $75,000 ($150,000 for married filing joint). Form 5405--Instructions
Credit for First-Time Homebuyer in District of Columbia. Similar idea to First-Time Homebuyer Credit but credit is lower, phase-outs different and only applies to the purchase of a principal residence in District of Columbia. Form 8859
Adoption Credit. Credit of up to $12,150 for qualified adoption expenses. Phaseout for taxpayers with modified adjusted gross income over $182,180 (indexed for inflation). Form 8839
Making Work Pay Credit. Maximum credit of $400 ($800 for married couple) based on earned income. Credit phases out for taxpayers with AGI over $75,000 ($150,000 for married filing joint). See Schedule M of Form 1040. Schedule M
Credit Against Regular Tax for Prior Year Minimum Tax Liability. You may be able to claim a credit for some or all of the alternative minimum tax paid in prior years. See Form 8801 and instructions. Form 8801--Instructions
Mortgage Interest Credits. For low-income taxpayers who have qualified mortgage credit certificates (MCCs) from a state or local government. This credit is subject to recapture if home is sold or is no longer taxpayer's principal residence within 10 years of testing date. Amount of credit determined by certificate credit rate and interest paid. Annual credit limited to $2,000. Form 8396
Credit for the Elderly or the Permanently and Totally Disabled. The credit is 15% of specified initial amounts which is reduced by amounts received as pension, annuity, or disability benefits that are excluded from gross income.
Rehabilitation credit. A credit for expenditures for rehabilitating a certified historic structure or building first placed in service before 1936.
Credit for Capital Gain Tax. Undistributed capital gain of a mutual fund must be reported to and included in the income of shareholders. Any tax paid by the company is deemed paid by the shareholders and the shareholders are allowed a credit. Copy B of Form 2439, must be attached to the return claiming the credit.
Alternative Motor Vehicle Credit. Includes a number of energy efficient vehicles, including fuel cell vehicles, advanced lean burn technology vehicles, alternative fuel motor vehicles, etc. From a practical standpoint, the most frequently encountered credit is for hybrid cars. The law restricts the number of vehicles that qualify from a manufacturer. As a result Toyota and Honda cars no longer qualify. For a list of qualifying and phased-out vehicles, go to our Auto and Vehicle Tables page.
Tax Credit Bonds. Issued by state and local governments, the bonds don't pay interest but give the holder a tax credit based on the credit-allowance date. They come in a number of different forms including:
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 02/08/10