Topics
Child Tax Credit for Children Under Age 17
For 2007, you generally may claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2007. To figure the exact amount of your credit, however, you must complete the "Child Tax Credit Worksheet" in the IRS instructions to Form 1040 or 1040A to determine if the credit is limited by your tax liability. Even if the credit does exceed your tax liability, part or all of the credit may be refundable as an additional credit on Form 8812 if your earned income for 2007 exceeds $11,750 or you have three or more children.
The credit may also be limited if your adjusted gross income (AGI) exceeds the $55,000, $75,000, or $110,000 phase-out threshold for your filing status. If your AGI exceeds the threshold, the IRS instructions direct you to the worksheet in Publication 972, where the phase-out rules and other credit limitations are applied.
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Child and Dependent Care Credit
Did you hire someone to care for your children or other dependents while you work? If so, you may qualify for a tax credit for the expenses. You may claim the credit even if you work part time. The credit is generally available to the extent you have earnings from employment. If your employer has a plan qualifying you for tax-free child care, and if you are covered, you may be unable to claim a tax credit.
The credit is claimed on Form 2441 if you file Form 1040, or on Form 1040A, Schedule 2. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000.
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The Adoption Credit
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The credit is claimed on Form 8839. If you paid qualifying adoption costs in 2007 but the adoption was not final at the end of the year, the credit may not be claimed on your 2007 return.
If your employer pays your adoption expenses through a qualifying plan, this money can be excluded from your income, subject to rules similar to that of the credit. If you receive employer adoption benefits that are less than your qualifying adoption expenses, you may be able to claim the credit on Form 8839.
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Residential Energy Tax Credits
The Energy Policy Act of 2005 created a number of limited tax credits for individuals who make energy savings improvements to their homes in 2006 or 2007. The residential energy credits are claimed on Form 5695, which must be attached to Form 1040.
The maximum credit for all eligible improvements combined over both 2006 and 2007 is $500, of which no more than $200 can be for windows, but there are also separate caps on the credit for specific improvements. The increase in the basis of the residence due to the improvement is reduced by the amount of the credit.
To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements). Specific information regarding materials and equipment that qualify for the credit can be found at www.energystar.gov. Remember to obtain the manufacturer's certification of the item at the time of purchase.
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Tax Credit for Hybrid Vehicles
The alternative motor vehicle credit includes credits for hybrid vehicles purchased in 2007.
The amount of the credit depends on the vehicle's fuel economy and the projected lifetime fuel savings and is fixed by the IRS. The maximum hybrid vehicle credit under the law is $3,400, but thus far, the highest certification has been $3,150.
How to qualify for the hybrid credit: Only the original purchaser of a new qualifying hybrid vehicle may claim the hybrid vehicle credit. If you lease a qualifying vehicle, only the leasing company (and not you) may claim the credit.
The hybrid credit is subject to phaseout on a manufacturer-by-manufacturer basis.
Once a manufacturer sells its 60,000th hybrid vehicle after 2005 (all models), the tax credit for any of that manufacturer's certified hybrids is reduced as follows: For the second and third calendar quarters after the quarter in which the 60,000th qualifying vehicle is sold, you may claim 50% of the credit. For the fourth and fifth calendar quarters, you may claim 25% of the credit; no credit is allowed after the fifth quarter. For example, because Toyota (which includes Lexus) passed the 60,000 vehicle mark during the calendar quarter ending on June 30, 2006, Toyota and Lexus vehicles purchased in the first quarter of 2007, the credit is limited to 50% of the certified amount. For purchases in the next two quarters, the credit is limited to 25% of the certified amount; no credit can be claimed for a Toyota or Lexus vehicle purchased after September 30, 2007.
The credit for qualifying vehicles is claimed on Form 8910.
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Long-Term Unused Minimum Tax Credit
Employees who exercise incentive stock options do not report income for regular tax purposes. However, the spread between the exercise (strike) price and stock price is an adjustment for the alternative minimum tax (AMT). Unfortunately, some individuals exercised options when the stock price was high, only to sell when the price declined, suffering an economic loss while still paying significant AMT tax.
Starting in 2007 and running through 2012, such individuals may claim a refundable credit, usually up to $5,000 annually, for long-term unused minimum tax credits (those arising prior to 2004). Adjusted gross income limitations, however, bar high-income taxpayers from claiming this break.
The long-term unused minimum tax credit is claimed on Form 8801.
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Credit for Retirement Plan Savers
Those who contribute to a 401(k) plan or an IRA may gain a second tax break (in addition to the salary deferral for the 401(k) contribution or the deduction for the IRA contribution) -- a tax credit. The maximum credit is 50% of a contribution up to $2,000, for a top credit of $1,000.
The top credit applies only to those with modified adjusted gross income (MAGI) below a set amount. Those with slightly higher may qualify for a 20% or 10% credit. No credit can be claimed by MAGI is higher than $26,000 for singles, $39,000 for heads of households, and $52,000 for joint filers.
The credit is claimed on Form 8880.
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Summary
- For 2007, you generally may claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2007.
- If you hire someone to care for your children or other dependents while you work, you may qualify for a tax credit for the expenses.
- A tax credit of up to $11,390 may be available on your 2007 return for the qualifying costs of adopting a child under age 18.
- The Energy Policy Act of 2005 created a number of limited tax credits for individuals who make energy savings improvements to their homes.
- The alternative motor vehicle credit includes credits for buying hybrid vehicles.
- Those who paid alternative minimum tax in prior years, primarily because of exercising incentive stock options, may be eligible for a new refundable tax credit.
- Savers who put money into a 401(k), IRA or other similar plan may qualify for a tax credit.
