Claiming Federal Income Tax
Credits
Once you've decided that one or more of the available
tax credits apply to you, how do you go about claiming it? The easiest
answer is, you don't - you leave it up to your tax pro, because the rules for
most credits are too complicated for the uninitiated to handle.
However, we're including the basic concepts here, so that you can ask
intelligent questions of your accountant or lawyer, and see that he or she is
earning the fees that you pay. You can also use this information as a starting
point if you are a stouthearted do-it-yourselfer.
There are a number of steps you must take in the process of computing and
claiming your tax credits:
- Compute your regular tax liability. Before you can determine the
amount of your credits, you need to know what your income is for the year,
subtract all your allowable deductions, and compute your tax liability on
that basis (as if you had no credits). If you're a sole
proprietor, part of the process will be completing Schedule C (Profit or
Loss From Business), so you can determine your net income for your business.
If the credit was earned by a corporation,
compute the corporation's regular tax liability. If the credit was earned by
a business organized as a partnership
(or some entity taxed as a partnership, such as an LLC), the credits will be
computed at the business entity level, and then passed through to the
partners or members.
- Compute your alternative minimum tax liability, if any. Generally,
credits cannot be claimed to the extent that they would reduce your tax bill
below your tentative minimum
tax.
- Compute your nonrefundable credits and subtract them in the
prescribed order. The order is important because each credit is limited to
the amount of the tax minus the credits previously taken. Claim credits in
the following order:
- personal nonrefundable credits, such as the credit for child and
dependent care, the credit for the elderly and disabled, the adoption
credit, the child credit, and the credit for interest on certain home
mortgages
- the foreign tax credit
- the alternative fuels
credit
- the orphan drugs credit
- the credit for
qualified electric vehicles
- the general business credit,
which is made up of the following parts: the investment credit, the work
opportunity credit, the welfare-to-work credit, the alcohol fuels
credit, the research credit, the low-income housing credit, the
empowerment zone credit, the employer FICA credit on tips, the Indian
employment credit, the enhanced oil recovery credit, the disabled access
credit, the renewable-resource electricity production credit, and the
CDC credit. The investment
credit, in turn, is made up of the rehabilitation credit, the energy
credit, and the reforestation credit.
- Compute any carryback or carryover amounts, if you are unable to
subtract the full amount of your nonrefundable credits. The foreign tax
credit may be carried backwards into the past two tax years and forward for
five years, if necessary to use it up. Most of the components of the general
business credit, including the investment credit, can be carried backwards
into the past year, and then forward for 20 years - if these carrybacks and
carryforwards are insufficient to use up the credit, the remainder can be
deducted in the 21st year.
- Compute and subtract your refundable credits from your remaining
tax liability, if any. Refundable credits include the earned income credit,
credit for any income taxes withheld on your paycheck, and the credit
for gasoline and special fuels taxes. If subtracting these credits
leaves you with a tax liability below zero, the IRS will send you a check
for the difference.
Dollar limitations on credits. In most cases, the limit on the credits
you can claim for the year is computed as follows: take your regular tax
liability, subtract your tentative
minimum tax liability, and the result is the dollar limit on credits you can
claim for the year. The credits are subtracted in a prescribed order, and some,
including the general business credit,
have additional limits that must be observed.
Forms to use. Most of the credits must be computed on their own
special IRS forms. In addition, if you are claiming more than one of the
components of the general business credits, if you have a carryback or
carryover, or a credit from a passive activity, you will also need Form 3800, General
Business Credit, to compute any limitations on the combined credit
components.