NFIB

Tax Credits
03/ 28/ 2002


In today's Workshop, Edith Helmich discusses the complexities of tax credits.

Failing to identify all allowable tax credits is an expensive error. While deductions reduce the amount of taxed income, credits are subtracted from the amount of tax liability on a dollar-to-dollar basis. Remember that you are allowed credits whether or not taxes are itemized. Although there are a plethora of possible tax credits, most fall into the following major categories:

1. Non-refundable Tax Credits (credits can only be subtracted up to the amount of the total tax liability).

In this category, personal expenditures for household and dependent (child care) credit, elderly and disabled credit, adoption expense credit, the HOPE and Lifetime Learning education credit and home mortgage interest credit are eligible. When applicable, credit may be allowed for foreign tax payments, non-conventional source fuels credit, the qualified electric vehicle credit and the Puerto Rico economic activity credit.

2. Refundable Tax Credits (when the amount of the credit exceeds your tax liability, the excess may be received in the form of a tax refund check).

Credit is allowed for expenditures such as taxes withheld on wages, tax withheld on payments to nonresidents and foreign corporations and the gasoline and special fuels credit. Low-income taxpayers may qualify for the earned income credit and the child tax credit.

3. General Business Credits (multiple opportunities for credits exist, but special IRS requirements for eligibility and documentation must be met).

A partial list of possible credits include employer Social Security credit, work opportunity credit, welfare-to-work credit, disabled access credit, rehabilitation credit, the energy credit, research credit, low-income housing credit, empowerment zone employment credit and the community development credit. Other regional and more specialized credits may be applicable for certain businesses.

Credit for the prior year's minimum tax liabilities often requires complex calculations. Such credit is designed to reimburse taxpayers for taxes paid in earlier years as a result of specific deferred items (such as accelerated depreciation) that do not result in a permanent reduction in regular tax liability.

Take time to study the list of tax credits and select those categories that apply to your 1999 taxes. Remember that federal income tax rules are complex and require informed judgment to avoid surprises. Before claiming a tax credit, always confirm your eligibility and review the type of documentation required with your accountant, attorney and the Internal Revenue Service.

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