Publication 17 (2005), Your Federal Income Tax

37. Other Credits

Table of Contents

What's New for 2005

Adoption credit. The maximum adoption credit increases to $10,630. See Adoption Credit, for more information.

Excess withholding of social security tax and railroad retirement tax. Social security and tier 1 railroad retirement tax (RRTA) are both withheld at a rate of 6.2% of wages. The maximum wages subject to this tax increased to $90,000 in 2005. The withholding rate of tier 2 RRTA decreased to 4.4% of wages in 2005. The maximum wages subject to this tax increased to $66,900 in 2005. If you had too much social security or RRTA tax withheld during 2005, you may be entitled to a credit of the excess withholding. For more information about the credit, see Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld under Refundable Credits, later.

What's New for 2006

Residential energy credit. You may be able to take a residential energy credit for expenses paid in 2006 to have qualified energy saving items installed in your main home. See Publication 553 for more information.

Alternative motor vehicle credit. You may be able to take a credit if you place an energy efficient motor vehicle or alternative fuel vehicle refueling property in service in 2006. See Publication 553 for more information.

Qualified electric vehicle credit. The qualified electric vehicle credit is reduced by 75% for qualified vehicles placed in service in 2006.

Introduction

This chapter discusses the following credits.

Adoption credit.
Foreign tax credit.
Mortgage interest credit.
Retirement savings contributions credit.
Credit for prior year minimum tax.
Qualified electric vehicle credit.
Credit for excess social security tax or railroad retirement tax withheld.
Credit for tax on undistributed capital gain.
Health coverage tax credit.

Several other credits are discussed in other chapters in this publication.

Child and dependent care credit (chapter 32).
Credit for the elderly or the disabled (chapter 33).
Child tax credit (chapter 34).
Education credits (chapter 35).
Earned income credit (chapter 36).

Nonrefundable credits. The first part of this chapter, Nonrefundable Credits, covers six credits that you subtract from your tax. These credits may reduce your tax to zero. If these credits are more than your tax, the excess is not refunded to you.

Refundable credits. The second part of this chapter, Refundable Credits, covers three credits that are treated as payments and are refundable to you. These credits are added to the federal income tax withheld and any estimated tax payments you made. If this total is more than your total tax, the excess will be refunded to you.

Useful Items - You may want to see:

Publication

502 Medical and Dental Expenses
514 Foreign Tax Credit for
Individuals
530 Tax Information for First-Time Homeowners
535 Business Expenses
590 Individual Retirement Arrangements (IRAs)

Form (and Instructions)

1116
Foreign Tax Credit (Individual, Estate, or Trust)
2439
Notice to Shareholder of Undistributed Long-Term Capital Gains
8396
Mortgage Interest Credit
8801
Credit For Prior Year Minimum Tax — Individuals, Estates, and Trusts
8828
Recapture of Federal Mortgage Subsidy
8834
Qualified Electric Vehicle Credit
8839
Qualified Adoption Expenses
8880
Credit for Qualified Retirement Savings Contributions
8885
Health Coverage Tax Credit

Nonrefundable Credits

The credits discussed in this part of the chapter can reduce your tax. However, if the total of these credits is more than your tax, the excess is not refunded to you.

Adoption Credit

You may be able to take a tax credit of up to $10,630 for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses.

If your modified adjusted gross income (AGI) is more than $159,450, your credit is reduced. If your modified AGI is $199,450 or more, you cannot take the credit.

Qualifying expenses. Qualifying adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:

Adoption fees,
Court costs,
Attorney fees,
Traveling expenses (including amounts spent for meals and lodging) while away from home, and
Re-adoption expenses to adopt a foreign 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,
For which you received funds under 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:

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

Child with special needs. An eligible child is a child with special needs if all three of the following apply.

He or she is a citizen or resident of the United States (including U.S. possessions).
A state (including the District of Columbia) determines that the child cannot or should not be returned to his or her parents' home.
The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by the state to make this determination include:
1. The child's ethnic background,
2. The child's age,
3. Whether the child is a member of a minority or sibling group, or
4. Whether the child has a medical condition or physical, mental, or emotional handicap.

When to take the credit. Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses are paid or incurred. See the instructions for Form 8839 for more specific information on when to take the credit.

Foreign child. If the child is not a U.S. citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.

How to take the credit. To take the credit, you must complete Form 8839 and attach it to your Form 1040 or Form 1040A. Enter the credit on Form 1040, line 53, or Form 1040A, line 34.

Foreign Tax Credit

You generally can choose to take 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 22).

You cannot take a credit (or deduction) for foreign income taxes paid on income that you exclude from U.S. tax under any of the following.

Foreign earned income exclusion.
Foreign housing exclusion.
Income from Puerto Rico exempt from U.S. tax.
Possession exclusion.
Extraterritorial income exclusion.

Limit on the credit. Unless you can elect not to file Form 1116 (see Exception, later), your foreign tax credit cannot be more than your U.S. tax liability (Form 1040, line 44), 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 take the credit. Complete Form 1116 and attach it to your Form 1040. Enter the credit on Form 1040, line 47.

Exception. You do not have to complete Form 1116 to take the credit if all five of the following apply.

All of your gross foreign source income was from interest and dividends and all of that income and the foreign tax paid on it were reported to you on Form 1099-INT, Form 1099-DIV, or Schedule K-1 (or substitute statement).
If you had dividend income from shares of stock, you held those shares for at least 16 days.
You are not filing Form 4563 or excluding income from sources within Puerto Rico.
The total of your foreign taxes was not more than $300 (not more than $600 if married filing jointly).
All of your foreign taxes were:
1. Legally owed and not eligible for a refund, and
2. Paid to countries that are recognized by the United States and do not support terrorism.

For more details on these requirements, see the instructions for Form 1116.

Mortgage Interest Credit

The mortgage interest credit is intended to help lower-income individuals own a home. If you qualify, you can take the credit each year for part of the home mortgage interest you pay.

Who qualifies. You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.

Amount of credit. Figure your credit on Form 8396. If your mortgage is equal to (or smaller than) the certified indebtedness amount (loan) shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.

If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.

	Certified indebtedness amount on your MCC
	Original amount of your mortgage

If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. See Publication 530 for more information.

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

Carryforward. If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 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%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).

How to take the credit. Figure your 2005 credit and any carryforward to 2006 on Form 8396, and attach it to your Form 1040. Be sure to include any credit carryforward from 2002, 2003, and 2004.

Include the credit in your total for Form 1040, line 54, and check box a.

Reduced home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2006. For more information about the home mortgage interest deduction, see chapter 23.

Recapture of federal mortgage subsidy. If you received an MCC with your mortgage loan, you may have to recapture (pay back) all or part of the benefit you received from that program. The recapture may be required if you sell or dispose of your home at a gain during the first 9 years after the date you closed your mortgage loan. See Publication 523, Selling Your Home, for more information.

Retirement Savings Contributions Credit

You may be able to take this credit if you, or your spouse if filing jointly, made:

Contributions to a traditional or Roth IRA,
Elective deferrals to a 401(k), 403(b), governmental 457, SEP, or SIMPLE plan,
Voluntary employee contributions to a qualified retirement plan (including the federal Thrift Savings Plan), or
Contributions to a 501(c)(18)(D) plan.

However, you cannot take the credit if either of the following applies.

The amount on Form 1040, line 38, or Form 1040A, line 22, is more than $25,000 ($37,500 if head of household; $50,000 if married filing jointly).
The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1988, (b) is claimed as a dependent on someone else's 2005 tax return or (c) was a student (defined next).

Student. You were a student if during any 5 months of 2005 you:

Were enrolled as a full-time student at a school, or
Took a full-time, on-farm training course given by a school or a state, county, or local government agency.

School. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or internet school.

How to take the credit. Figure the credit on Form 8880. Enter the credit on your Form 1040, line 51, or your Form 1040A, line 32, and attach Form 8880 to your return.

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 take 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 for 2004 you had:

An alternative minimum tax liability and adjustments or preferences other than exclusion items,
A minimum tax credit that you are carrying forward to 2005, or
An unallowed nonconventional source fuel credit or qualified electric vehicle credit.

How to take the credit. Figure your 2005 credit and any carryforward to 2006 on Form 8801, and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55, and check box b. You can carry forward any unused credit for prior year minimum tax to later years until it is completely used.

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

Qualified Electric Vehicle Credit

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

Qualified electric vehicle. Generally, this is a vehicle that:

Has at least four wheels and is manufactured primarily for use on public streets, roads, and highways,
Is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current,
Is originally used by you,
Is acquired for your own use, not for resale,
Has never been used as a nonelectric vehicle, and
Is used predominately in the United States.

Amount of credit. If you placed a qualified electric vehicle in service during 2005, the credit is generally 10% of the cost of the vehicle. However, if the vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit. See 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 2005.

Recapture. 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 (or its use is modified) so that it is no longer eligible for the credit. You recapture the credit by adding part or all of it to your income tax for the year in which the recapture event occurs. See Publication 535, chapter 12, for more information.

How to take the credit. To take the credit, complete Form 8834 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c, and enter “8834” on the line next to box c.

Do not confuse this credit with the deduction for clean-fuel vehicles which is discussed in Publication 535, chapter 12.

Refundable Credits

The credits discussed in this part of the chapter are treated as payments of tax. If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, the excess can be refunded to you.

Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld

Most employers must withhold social security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.

If you worked for two or more employers in 2005, you may have had too much social security or RRTA tax withheld from your pay. You can claim the excess social security or RRTA tier 1 tax as a credit against your income tax. The following table shows the maximum amount of wages subject to tax and the maximum amount of tax that should have been withheld in 2005.

Type of tax	Maximum wages subject to tax	Maximum tax that should have been withheld
Social security or RRTA tier 1	$90,000	$5,580.00
RRTA tier 2	$66,900	$2,943.60

All wages are subject to Medicare tax withholding.

Use Form 843, Claim for Refund and Request for Abatement, to claim a refund of excess RRTA tier 2 tax. See Publication 505, Tax Withholding and Estimated Tax, for details.

Employer's error. If any one employer withheld too much social security or RRTA tax, you cannot take the excess as a credit against your income tax. The employer should adjust the tax for you. If the employer does not adjust the overcollection, you can file a claim for refund using Form 843.

Joint return. If you are filing a joint return, you cannot add the social security or RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Figure the credit separately for you and your spouse to determine if either of you has excess withholding.

How to figure the credit if you did not work for a railroad. If you did not work for a railroad during 2005, figure the credit as follows:

1.	Add all social security tax withheld (but not more than $5,580.00 for each employer). Enter the total here
2.	Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 63
3.	Add lines 1 and 2. If $5,580.00 or less, stop here. You cannot take the credit
4.	Social security tax limit	5,580.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 67 (or Form 1040A, line 43)

Example.

You are married and file a joint return with your spouse who had no gross income in 2005. During 2005, you worked for the Brown Shoe Company and earned $52,000 in wages. Social security tax of $3,224 was withheld. You also worked for another employer in 2005 and earned $40,200 in wages. $2,492.40 of social security tax was withheld from these wages. Because you worked for more than one employer and your total wages were more than $90,000, you can take a credit of $136.40 for the excess social security tax withheld.

1.	Add all social security tax withheld (but not more than $5,580.00 for each employer). Enter the total here	$5,716.40
2.	Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 63	-0-
3.	Add lines 1 and 2. If $5,580.00 or less, stop here. You cannot take the credit	5,716.40
4.	Social security tax limit	5,580.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 67 (or Form 1040A, line 43)	$136.40

How to figure the credit if you worked for a railroad. If you were a railroad employee during 2005, figure the credit as follows:

1.	Add all social security and tier 1 RRTA tax withheld (but not more than $5,580.00 for each employer). Enter the total here
2.	Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 63
3.	Add lines 1 and 2. If $5,580.00 or less, stop here. You cannot take the credit
4.	Social security and tier 1 RRTA tax limit	5,580.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 67 (or Form 1040A, line 43)

How to take the credit. Enter the credit on Form 1040, line 67, or Form 1040A, line 43.

Credit for Tax on Undistributed Capital Gain

You must include in your income any amounts that regulated investment companies (commonly called mutual funds) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even if you did not actually receive them. If the mutual fund or REIT paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. The mutual fund or REIT will send you Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, showing the undistributed capital gains and the tax paid, if any. Take the credit for the tax paid by entering the amount on Form 1040, line 70, and checking box a. Attach Copy B of Form 2439 to your return. See Capital Gain Distributions in chapter 8 for more information on undistributed capital gains.

Health Coverage Tax Credit

You may be able to take this credit only if, for any month in 2005, all of the following apply.

You were an eligible trade adjustment assistance (TAA) recipient, alternative TAA recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient (defined later).
You were covered by a qualified health insurance plan for which you paid the premiums.
You were not entitled to Medicare Part A or enrolled in Medicare Part B.
You were not enrolled in Medicaid or State Children's Health Insurance Program (SCHIP).
You were not enrolled in the Federal Employees Health Benefits Program or eligible to receive benefits under the U.S. military health system (TRICARE).
You were not imprisoned under federal, state, or local authority.

But, you cannot take the credit if you can be claimed as a dependent on someone else's 2005 tax return. If you meet all of these conditions, you may be able to take a credit of up to 65% of the amount you paid for qualified health insurance coverage. The amount you paid for qualified health insurance coverage must be reduced by any (a) Archer MSA and health savings account distributions used to pay for the coverage, and (b) National Emergency Grants you received for health insurance in 2005.

You can take this credit on your tax return or have it paid on your behalf in advance to your insurance company. If the credit is paid on your behalf in advance, that amount will reduce the amount of the credit you can take on your tax return.

For definitions and special rules including those relating to qualified health insurance plans and employer-sponsored health insurance plans, see Publication 502 and the instructions for Form 8885.

TAA Recipient

You were an eligible TAA recipient on the first day of the month if, for any day in that month or the prior month, you:

Received a trade readjustment allowance, or
Would have been entitled to receive such an allowance except that you had not exhausted all rights to any unemployment insurance (except additional compensation that is funded by a state and is not reimbursed from any federal funds) to which you were entitled (or would be entitled if you applied).

Example. You received a trade adjustment allowance for January 2005. You were an eligible TAA recipient on the first day of January and February.

Alternative TAA Recipient

You were an eligible alternative TAA recipient on the first day of the month if, for that month or the prior month, you received benefits under an alternative trade adjustment assistance program for older workers established by the Department of Labor.

Example. You received benefits under an alternative trade adjustment assistance program for older workers for October 2005. The program was established by the Department of Labor. You were an eligible alternative TAA recipient on the first day of October and November.

PBGC Pension Recipient

You were an eligible PBGC pension recipient on the first day of the month, if both of the following apply.

You were age 55 or older on the first day of the month.
You received a benefit for that month that was paid by the PBGC under title IV of the Employee Retirement Income Security Act of 1974 (ERISA).

If you received a lump-sum payment from the PBGC after August 5, 2002, you meet item (2) above for any month that you would have received a PBGC benefit if you had not received the lump-sum payment.

How To Take the Credit

To take the credit, complete Form 8885 and attach it to your Form 1040. Include your credit in the total for Form 1040, line 70, and check box c.

You must attach invoices and proof of payment for any amounts you include on Form 8885, line 2, for which you did not receive an advance payment. For details, see Publication 502 or Form 8885.