Tax Credits:

Tax Credit FAQs

Q.Does my client qualify to take the child and dependent care credit?
A.They may qualify for the credit if they paid someone to care for their dependent who is under the age of 13 or a disabled dependent or spouse in order to allow them to work or look for work. IRS Publication 503, Child and Dependent Care Expenses, can address any questions they might have.

Q.Can my client take the earned income credit?
A.The qualifications for this credit are based on the income earned combined with the number of dependents they have. If no children lived with them and they earned less than $10,200, one child lived with them and they made less than $26,928, or more than one child lived with them and they made less than $30,580, they may qualify. Other rules apply as well. See IRS Publication 596, Earned Income Credit, for more information.

Q.What are advance earned income credit payments?
A.Advanced earned income credit or AEIC means that if your client expects to qualify for the earned income credit in 2000, they may be able to start getting part of their credit distributed in their pay instead of waiting until they file their 2000 tax return in 2001. They must have at least one qualifying child in order to qualify for AEIC. See IRS Publication 596, Earned Income Credit, for more details on qualification.

Q.What is the Work Opportunity Credit?
A.Individuals who hired high-risk people from certain targeted groups that have a high unemployment rate may take the Work Opportunity Tax Credit. Claimed by filing Form 5884, Working Opportunity Credit, this credit can be as much as 40% of the qualified wages your client pays to a qualified employee who began working for them between October 1996 and June 30, 1999. In order to be considered a member of a targeted group, their state employment agency must certify the individual as a member. Your client must receive this certification before claiming the credit.

Q.Are tax credits still available to people who buy diesel-powered cars and vans?
A. The program has now ended and the IRS no longer offers a credit for people who buy cars, vans or light trucks that operate on diesel fuel rather than gasoline. For vehicles purchased after Aug. 20, 1996, the tax credit for purchasers of diesel-powered cars, vans and light trucks is repealed.

Q. Does my client's filing status affect tax deductions, credits and rates?
A. Your client's filing status is an important factor in determining whether they are required to file, the amount of their standard deduction and their correct amount of tax. Their filing status is also important in determining whether they can take other deductions and/or credits. There are five filing statuses to choose from: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. Different tax rates apply to different filing statuses. The 1999 standard deductions for the various filing statuses are: Single, $4,300; Head of Household, $6,350; Married Filing Jointly, $7,200; Married Filing Separately, $3,600; and Qualifying Widow(er), $7,200.

Q. What sort of records must my client keep to claim a credit for childcare or dependent-care expenses?
A. They should always keep documents indicating the dates and amounts of various fees they paid to an individual or a center to take care of their child or other dependent while they worked. If a childcare worker lives in their home, keep track of the cost of meals and lodging expenses paid to him/her.

Q. Is it true that taking the child-care tax credit can trigger an audit?

A. It is true that certain deductions are often red-flagged by the IRS. Unfortunately, child-care expenses are one of them. This is because often people pay their providers in cash and have no receipts to substantiate these deductions so a large claim for childcare credits may invite an audit. Paying by check and getting receipts for costs paid to your client's provider will come in handy should the IRS come knocking.

Q. Who is eligible for a Hope Scholarship tax credit?

A. As part of the Taxpayer Relief Act of 1997, the Hope Scholarship tax credit allows most people to take a credit of up to $1,500 a year for college tuition and related expenses. The credit can be claimed for expenses for the education of the taxpayer, a spouse, or a dependent. The Hope Scholarship credit cannot be claimed by a student if the student is claimed as a dependent on another person's tax return. A parent may claim the Hope Scholarship credit even if their child paid their own tuition but is claimed as a dependent by parents.

Q. What is the Lifetime Learning tax credit?

A. The Lifetime Learning tax credit is also a byproduct of the Taxpayer Relief Act of 1997. This nonrefundable credit can be applied against federal income taxes equal to 20% of college tuition and fees (up to $5,000) incurred during a year by a taxpayer, a spouse or a taxpayer's dependent. This means that the maximum tax credit per return will be $1,000. The Hope Scholarship credit and the Lifetime Learning Credit cannot be taken in the same year.

Q.What is the Mortgage Credit Certificate Program?

A. The Mortgage Credit Certificate program allows first-time homebuyers to take advantage of a special federal income tax cuts. The amount of the credit is tied to a local formula that every city with an MCC program must follow and may total $2,000 or more by reducing the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. To see if your community has an MCC program, call your client's local housing or redevelopment agency.

Q. Does historic rehabilitation receive any special tax breaks?

A. A 20% investment tax credit for qualified rehabilitation expenses is currently taken for rehabilitated buildings and certified historic structures. A historic structure is one listed in the National Register of Historic Places or has been designated by an appropriate state or local historic district as being so. The tax code does not allow deductions for the demolition or significant alteration of a historic structure.

Q. My client's ex-spouse has custody of their child. Can they still claim the new dependent child tax credit?

A. If all of the following are true, they can claim the child care credit: 1) the child is claimed as a dependent on their tax return, 2) the child is under age 17 on the last day of the year in question, 3) the child is their child, grandchild, stepchild, or adopted child. The credit is phased out for married couples whose combined adjusted gross income exceeds $110,000 and for single people whose adjusted gross income is above $75,000.

Q. If my client continues to claim an exemption for his/her children, can he/she claim the new dependent child tax credit?

A. Yes they can. The dependent child credit is in addition to the income tax exemptions allowed for each dependent child. In 1999, each exemption is worth $2,750. The credit is $500 per child in 1999.

Q. What is the dependent child credit (also known as the "kiddie tax credit")?

A. The Taxpayer Relief Act of 1997 created a new type of tax credit for parents, grandparents and others who are responsible for the care of children under the age of 17. Families that qualify receive a credit of $500 per child in 1999. The credit is phased out for married couples whose combined adjusted gross income tops $110,000 and for single people whose adjusted gross income is above $75,000. The amount of the credit is reduced by $50 for each $1,000 in income over these income limits.