Tax Credits You Shouldn't Miss

by Mark P. Cussen,CFP®, CMFC (Contact Author | Biography)

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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.

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.)

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.)

Residential Energy Tax Credits
These credits were created by the Energy Policy Act of 2005, and are available to those who made energy-saving improvements to their U.S. residences in 2006 and 2007. A number of different types of improvements qualify for this credit, such as home insulation, new furnaces or boilers, more efficient water heaters or central air-conditioning systems and fans. Energy-efficient exterior doors, windows and roofs will also qualify for this credit, provided they meet certain requirements.

Utility and state rebates are also available for certain taxpayers, as well as state tax incentives, which are available for homeowners who meet certain requirements.

For 2006 and 2007, this credit is limited to the lesser of 10% of the amount of qualified energy-efficient expenses incurred or $500 (for both years combined). Several lesser credit limits apply to various other energy-efficient expenses as well.

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 Home Energy Savings Add Up to learn more.)

Tax Credit for Hybrid and Alternative Fuel Vehicles
In 2005, the alternative motor vehicle credit was created to provide tax credits for the purchase of four separate types of vehicles:

Hybrid vehicles
Alternative fuel vehicles
Fuel cell vehicles
Advanced lean burn technology vehicles

These vehicles are assigned an IRS certification that qualifies them for a credit. In order to qualify, the vehicle must be purchased new between 2005 and 2010 and be used primarily in the

U.S.

This tax credit is reduced for taxpayers based on the number of vehicles sold. After a manufacturer has sold 60,000 vehicles, you can claim 50% of the credit during the first two calendar quarters after the quarter in which the 60,000th vehicle was sold and a 25% credit in the third quarter. No credit may be claimed after that.

The credit is calculated on IRS Form 8910, and a complete list of qualified hybrid and alternative fuel vehicles can be found in the Alternative Motor Vehicle Credit section of the IRS website. (Learn more about fuel-efficient vehicles in Hybrids: Financial Friends Or Foes?)

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.)

Conclusion
The purpose of this article is to enlighten the reader about possible credits to which he or she 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.

by Mark P. Cussen (Contact Author | Biography)

Mark P. Cussen has over 13 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has two years of experience in writing and editing insurance and securities test training manuals, as well as other financial topics. He has also worked in in retail, discount and bank brokerage systems and been involved in a venture capital enterprise in the oil and gas sector. Cussen has a Bachelor of Science in English from the University of Kansas and completed his CFP®; coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.

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