WHAT IS Miscellaneous Tax Credits
Miscellaneous tax credits are a group of less common tax credits that apply to taxpayers in various situations. As with all other tax credits, miscellaneous tax credits are designed to reward and promote certain types of economic activities such as the purchase of hybrid automobiles, or to reward those who have taken measures to make their homes more energy-efficient. Miscellaneous tax credits therefore are subject to change as the tax code changes and different sets of behaviors are rewarded or discouraged.
Tax Deductions Vs. Tax Credits
BREAKING DOWN Miscellaneous Tax Credits
Miscellaneous tax credits refers to a category of tax credits offered to taxpayers who perform certain actions to qualify for them. There are several miscellaneous tax credits available, including the Mortgage Interest Credit for first-time homebuyers with incomes under a certain amount, the Prior-Year Alternative Minimum Tax Credit for taxpayers who paid the Alternative Minimum Tax (AMT) in a previous year, the Foreign Tax Credit for taxpayers who have paid tax to a foreign country for a variety of reasons and the Qualified Electric Vehicle Credit for taxpayers who purchase an electric or alternative fuel vehicle.
Most miscellaneous tax credits are non-refundable, which means that they can reduce the amount the taxpayer is required to pay to the Internal Revenue Service (IRS) in taxes, but if the miscellaneous tax credits reduce the tax burden so much that they give the taxpayer a credit, this amount cannot be refunded to the taxpayer. The exceptions to this rule are the credit for excess Social Security taxes that have been withheld from the taxpayer’s paychecks, because this is actual money that the taxpayer should have received, and the credit for railroad retirement benefits that have been withheld, because these benefits are not supposed to be taxed so the taxpayer should have received the full amount of these benefits.
Miscellaneous Tax Credits vs Miscellaneous Tax Deductions
Miscellaneous tax credits are applied after the taxpayer’s income and tax liability is calculated, and they subtract the amount of the credit directly from the amount of tax the taxpayer owes. In contrast, miscellaneous tax deductions are subtracted from the taxpayer’s income and affect the total taxable income, which is used to calculate the tax liability of the taxpayer. Tax credits are commonly referred to as after tax, while tax deductions are referred to as before tax. Miscellaneous tax credits can be taken as long as the taxpayer qualifies for the credit. Miscellaneous tax deductions can only be taken if the total deductions are greater than 2 percent of the taxpayer’s gross income.