Nonrefundable Credits

The following credits are discussed in this part.

• Adoption credit.
• Foreign tax credit.
• Mortgage interest credit.
• Credit for prior year minimum tax.
• Credit for electric vehicles.

Adoption Credit

You may be able to take a tax credit of up to $5,000 for qualifying expenses paid to adopt an eligible child. The credit can be as much as $6,000 if the expenses are for the adoption of a child with special needs.

Qualifying expenses. Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.

Nonqualifying expenses. Qualifying adoption expenses do not include expenses:

• That violate state or federal law,
• For carrying out any surrogate parenting arrangement,
• For the adoption of your spouse’s child,
• Paid using funds received from any federal, state, or local program,
• Allowed as a credit or deduction under any other federal income tax rule, or
• Paid or reimbursed by your employer or any other person or organization.

Eligible child. The term "eligible child" means any individual:

1. Under 18 years old, or
2. Physically or mentally incapable of caring for himself or herself.

After December 31, 2001, the adoption credit applies only if the eligible child is a child with special needs.

Child with special needs. An eligible child is a child with special needs if:

1. He or she is a citizen or resident of the United States (including the District of Columbia and U.S. possessions) and
2. A state determines that the child cannot or should not be returned to his or her parents’ home and probably will not be adopted unless adoption assistance is provided to the adoptive parents.

Factors used by states to determine if a child has special needs could include:

• The child’s ethnic background,
• The child’s age,
• Whether the child is a member of a minority or sibling group, or
• Whether the child has a medical condition or physical, mental, or emotional handicap.

A foreign child cannot be treated as a child with special needs.

How to claim the credit. To claim the credit, you must complete Form 8839 and attach it to your Form 1040 or Form 1040A. Enter the credit on line 48, Form 1040, or line 31, Form 1040A.

Foreign Tax Credit

You generally can choose to claim income taxes you paid or accrued during the year to a foreign country or U.S. possession as a credit against your U.S. income tax. Or, you can deduct them as an itemized deduction.

How to claim the credit. Your foreign tax credit is subject to a limit based on your taxable income from foreign sources. You generally figure your limit and the credit on Form 1116.

Election not to file Form 1116. You will not be subject to the limit and may be able to claim the credit without using Form 1116 if all the following requirements are met.

1. You are an individual.
2. Your only foreign source income for the tax year is passive income (dividends, interest, royalties, etc.) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
3. Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return) and are reported on a payee statement.
4. You elect this procedure for the tax year.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year.

Enter the credit on line 43, Form 1040. For more information on the foreign tax credit, see Publication 514.

Mortgage Interest Credit

Mortgage credit certificates issued by state and local governments may entitle a certificate holder to a mortgage interest credit. The certificate must be used in connection with the purchase, qualified rehabilitation, or qualified home improvement of the certificate holder’s main home.

Who qualifies. You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) under a qualified MCC program. The MCC must relate to your main home.

Amount of credit. If your mortgage is equal to (or smaller than) the certified indebtedness amount (loan) shown on your MCC, you multiply the certified credit rate, shown on your MCC, by all the interest you paid on your mortgage during the year.

If your mortgage is larger than the certified indebtedness amount shown on your MCC, you multiply the certified credit rate, shown on your MCC, by only the interest allocated to the certified indebtedness amount shown on your MCC.

If the certificate credit rate is more than 20%, the credit cannot be more than $2,000.

Carryforward. If your allowable credit is more than your tax liability reduced by certain credits, you can carry forward the unused portion of the credit to your next 3 tax years or until used, whichever comes first.

If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, no amount over the $2,000 (or your prorated share of the $2,000 if you must allocate the credit) may be carried forward.

Reduced home mortgage interest deduction. If you claim the credit and itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction. Reduce your deduction by the amount on line 3 of Form 8396, even if part of that amount is to be carried forward to 2001. For more information about the home mortgage interest deduction, see chapter 25.

Recapture of federal mortgage subsidy. If your home was financed with a mortgage from a qualified mortgage bond program or you received an MCC after December 31, 1990, you may be subject to a recapture rule. The recapture would generally occur if you sold or disposed of your home during the first 9 years after the date you closed your mortgage loan. See Publication 523, Selling Your Home, for more information.

How to claim the credit. Figure the credit and any carryforward to next year on Form 8396, and attach it to your Form 1040. Be sure to include any carryforward from 1997, 1998, and 1999. You cannot use a carryforward from 1996 on your tax return for 2000 or any year after 2000.

Include the credit in your total for line 49 (Form 1040), and check box b.

Credit for Prior Year Minimum Tax

The tax laws give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. If you benefit from these laws, you may have to pay at least a minimum amount of tax in addition to any other tax on these items. This is called the alternative minimum tax.

The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. If in prior years you paid alternative minimum tax because of these tax postponement items, you may be able to claim a credit for prior year minimum tax against your current year’s regular tax. The amount of the credit cannot reduce your current year’s tax below your current year’s tentative alternative minimum tax.

You may be able to take a credit against your regular tax if you:

1. Paid alternative minimum tax in 1999,
2. Had an unused minimum tax credit that you are carrying forward from 1999 to 2000, or
3. Had unallowed qualified electric vehicle credits in 1999.

How to claim the credit. Figure your 2000 credit and any carryforward to 2001 on Form 8801, and attach it to your Form 1040. Include the credit in your total for line 49, Form 1040, and check box c. You can carry forward any unused credit for prior year minimum tax to later years until it is completely used.

For additional information about the credit, see the instructions for Form 8801.

Credit for Electric Vehicles

You may be allowed a tax credit if you placed a qualified electric vehicle in service during the year.

Qualified electric vehicle. This is a motor vehicle that:

1. Has at least four wheels and is manufactured primarily for use on public streets, roads, and highways,
2. Is powered primarily by an electric motor that draws its power from rechargeable batteries, fuel cells, or other portable sources of electrical current,
3. Is originally used by you, and
4. Is acquired for your own use, not for resale.

Amount of credit. The credit is equal to 10% of the cost of the vehicle. However, if the vehicle is a depreciable business asset, you must reduce the cost by any section 179 deduction before figuring the credit. Get Publication 463, Travel, Entertainment, Gift, and Car Expenses, for information on the section 179 deduction.

The credit is limited to $4,000 for each vehicle.

Special rules. You cannot take the credit if you use the vehicle predominately outside the United States.

The credit will be subject to recapture if, within 3 years after the date you place the vehicle in service, the vehicle is used predominately outside the United States or is modified so that it is no longer eligible for the credit.

How to claim the credit. To claim the credit, complete Form 8834, and attach it to your Form 1040. Include the credit in your total for line 49, check box d, and write "8834" on the line next to box d.

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