5 Tax Credits You Shouldn't Miss

Among the litany of tax credits available to the American taxpayer is an assortment of miscellaneous credits that apply to less common activities, such as the purchase of hybrid cars and making energy-saving improvements to your home. This article will outline the highlights of some of these lesser-known tax credits and show you who is eligible for them.

1. Health Coverage Credit
The health coverage tax credit is offered by the U.S. government in association with other federal agencies, state governments and private healthcare groups. This credit is designed to help pay for health insurance premiums for individuals and families who have lost health coverage due to foreign business competition. However, other persons who were receiving certain benefits from the Pension Benefit Guaranty Corporation (PBGC) or other trade-related government agencies are also eligible for this credit. (Find out more about how the PBGC helps protect against loss of employer plans in The Pension Benefit Guaranty Corporation Rescues Plans.)

Furthermore, this credit is excluded for those receiving Medicare or military health benefits, those in prison or those being claimed as a dependent on someone else's return. Eligibility for this credit is also contingent upon the use of a qualified health plan that has been approved by the IRS. Employees participating in eligible plans will be mailed a health coverage tax credit kit, and can claim the credit by completing IRS Form 8885 and submitting it with their personal tax returns. (The health coverage credit is a refundable credit, like the earned income credit or the additional child tax credit. Read Give Your Taxes Some Credit to learn more about the major refundable credits.)

2. Mortgage Interest Credit
If you received a mortgage credit certificate, you may qualify for the Mortgage Interest Credit. There are a number of state and local programs available that allow taxpayers to finance the purchase of a home through the use of a mortgage credit certificate. However, the residence must meet certain price and value requirements relative to the housing market in which the residence is located.

The amount of the credit is limited to the lesser of $2,000 or the full amount of the taxpayer's total tax liability, although any unused credit can be carried forward for up to three years. Taxpayers who itemize their deductions on Schedule A must reduce the amount of their deductible mortgage interest by the amount of the credit claimed, even if part of the credit must be carried forward to a future year. (Learn more about deducting your mortgage interest in The Mortgage Interest Tax Deduction.)

The mortgage interest credit is non-refundable and can be claimed by completing IRS Form 8396 and submitting it with your 1040 return (the credit should be included on line 54.)

3. Residential Energy Tax Credits
For 2011, there are two potential credits for improving your home's energy efficiency. You could claim one or both.

  • Nonbusiness Energy Property Credit
    You will receive the lesser of 10% of the cost of the improvements or $500 for adding insulation, changing exterior windows including skylights, exterior doors or roofing. However, window expenses are now limited to $200. You can also make energy efficiency improvements by replacing appliances such as an inefficient water heater or air conditioner. In order to claim the credit, qualifying improvements must be made between December 31, 2008 and January 1, 2012, and they must meet standards for energy efficiency.
  • Residential Energy Efficient Property Credit
    This is the credit for going a step further such as adding solar panels or harnessing your own wind energy. This credit is for 30% of the cost of the equipment for unlimited amounts. For instance, if you spent $100,000 on qualifying products, you would receive a tax credit of $30,000. The only limit is for fuel cells, which has a maximum credit of $500 per half kilowatt of capacity for the property.

Taxpayers can claim this credit by completing IRS Form 5695. Consult the IRS website for more information on residential energy tax credits. (Saving energy can also reduce your everyday bills. Read Ways To Slash Your Home Energy Bill to learn more.)

4. Tax Credit for Hybrid and Alternative Fuel Vehicles
As of 2011, this credit is no longer available; 2010 was the final phase out year for these vehicles.

5. Tax Credit for Undistributed Mutual Fund Capital Gains
Mutual fund capital gains distributions are normally reported on Form 1099-DIV.

However, some mutual fund investors may instead receive a Form 2439 from their mutual fund companies that allows them to claim a tax credit for capital gains that are withheld.

Although mutual fund companies usually distribute a pro-rata share of capital gains distributions to their shareholders, they can elect to retain the capital gain, pay a tax on it and make a capital gain allocation. Taxpayers who receive this form must report the gain, claim the credit and adjust the basis of their fund's shares.

For more information on this credit, download IRS Publication 564 from the IRS website. (Learn more about how you can save on capital gains tax just by being in the right tax bracket in Capital Gains Tax Cuts For Middle Income Investors.)

The Bottom Line
It is important to investigate possible credits to which you may be entitled. Each of these credits has many more provisions that have not been covered here, so consult the applicable publication before making any adjustments to your tax return. For more information on these and other tax credits, consult your tax advisor or visit the IRS website.

For more tips for avoiding stress at tax time, read Common Tax Questions Answered and Tax Tips For The Individual Investor.

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