Chapter 38
Other Credits

The following credits are discussed in this part.

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

Rate Reduction Credit

For 2001, the lowest tax rate is 10%. Most individuals received the benefits of the new 10% rate in an advance payment of income tax based on their 2000 tax returns. You can use the worksheet in your form instructions to determine whether you can claim the rate reduction credit based on your 2001 return.

Advance payment. Any advance payment of income tax that you received (before offset) during 2001 was based on your 2000 tax return. This payment is not subject to federal income tax. If you filed a joint return for 2000, you and your spouse are each considered to have received one-half of the advance payment.

This advance payment reduces your rate reduction credit. You cannot claim the credit if the advance payment is equal to the amount shown for your 2001 filing status.

• Single or married filing separately--$300.
• Head of household--$500.
• Married filing jointly or qualifying widow(er)--$600.

If your advance payment does not equal the amount shown, you may be able to claim the rate reduction credit.

Offsets. You are considered to have received the full amount of the advance payment even though all or part of that amount was used to offset (pay) certain past-due amounts. For information on offsets, see Offsets against debts, in chapter 1.

How to figure the credit. Use the Rate Reduction Credit Worksheet in your form instructions to figure your credit based on your 2001 tax return. If the credit is more than your advance payment, you can claim the difference as the rate reduction credit. If the credit is not more than your advance payment, you cannot claim the rate reduction credit. You do not have to pay back the advance payment that is more than your credit.

If you are filing a joint return for 2001, you must add your and your spouse's advance payments (before offsets) to determine the total advance payment received.

Example 1. For 2001, you are single and, based on your 2001 tax return, you qualify for a rate reduction credit of $250. During 2001, you received $300 as an advance payment of income tax. Since the advance payment is more than your rate reduction credit, you cannot claim the credit. You do not have to pay back any of your advance payment.

Example 2. You get married during 2001 and file a joint return for that year. Based on your 2001 tax return, you qualify for the maximum rate reduction credit of $600. During 2001, you received $225 and your spouse received $300 as advance payments of income tax based on your individual tax returns for 2000. You must reduce your maximum rate reduction credit by the advance payments you and your spouse received. Your credit for 2001 is $75.

Dependents. If you, or your spouse if filing a joint return, can be claimed as a dependent on someone else's return, you cannot claim the credit. Figure your tax using the Tax Computation Worksheet for Certain Dependents in your form instructions unless you, or your spouse if filing a joint return, received an advance payment of income tax during 2001.

Nonresident alien. If you were a nonresident alien at the end of the year you cannot claim the credit. See your Form 1040NR instructions for how to figure your tax.

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.

If your modified adjusted gross income (AGI) is more than $75,000, your credit is reduced. If your modified AGI is $115,000 or more, you cannot claim the credit.

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.

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.

When to claim the credit. Generally, you cannot take any credit before the year the adoption becomes final. See Publication 968 for information on when to claim expenses paid before the year the adoption becomes final.

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 49, 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 (see chapter 24).

You cannot take a credit (or deduction) for foreign income taxes paid on income that is exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion.

Limit on the credit. Your foreign tax credit cannot be more than your U.S. tax liability (line 40, Form 1040) multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. See Publication 514 for more information.

How to claim the credit. Complete Form 1116 and attach it to your Form 1040. Enter the credit on line 43, Form 1040.

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, Dividends and Distributions, or 1099-INT, Interest Income).
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 qualify and elect not to file Form 1116, enter the amount of your foreign taxes paid on line 43, Form 1040.

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

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 2002. 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, 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 your 2001 credit and any carryforward to 2002 on Form 8396, and attach it to your Form 1040. Be sure to include any credit carryforward from 1998, 1999, and 2000.

Include the credit in your total for line 50, 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 2000,
2. Had an unused minimum tax credit that you are carrying forward from 2000 to 2001, or
3. Had unallowed qualified electric vehicle credits in 2000.

How to claim the credit. Figure your 2001 credit and any carryforward to 2002 on Form 8801, and attach it to your Form 1040. Include the credit in your total for line 50, 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 placed in service in 2001.

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 50, Form 1040. Check box d, and print "8834" on the line next to box d.

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