Credits

March 13, 2024

760 / Who qualifies for the child tax credit?

<div class="Section1">Editor’s Note: The ARPA expanded and enhanced the child tax credit for the 2021 tax year. For tax years beginning after December 31, 2020 and before January 1, 2022, the child tax credit amount increased from $2,000 to $3,000 per qualifying child. The credit amount was also fully refundable for the 2021 tax year only (under TCJA, $1,400 was refundable, see below). The $3,000 amount was also increased to $3,600 per qualifying child under the age of six years old as of December 31, 2021. 17-year-olds were treated as qualifying children in 2021. The income phaseout ranges for the enhanced tax credit were also reduced. The phaseout began at $150,000 for married taxpayers filing jointly and $75,000 for single filers (down from $400,000 and $200,000 for the standard child tax credit). Additionally, the IRS paid 50% of the 2021 child tax credit during the second half of 2021, using 2020 tax data (although the amounts were subject to clawback in cases where the taxpayer did not qualify using 2021 tax information).<div class="Section1"> Eligible taxpayers were not required to take any action to receive the advance payments on the 15th of every month. Monthly payments totaled up to $300 for each child under age six and up to $250 per month for each child aged six and older. Depending upon the information the IRS had on file, payments were made via direct deposit, paper checks or debit cards. The advance payments totaled up to 50% of the amount the taxpayer was eligible to receive based on 2020 filing information. According to IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 could file simplified 2020 returns to receive monthly advance payments of the expanded child tax credit. Those taxpayers could file Form 1040, Form 1040-SR or Form 1040-NR to provide Social Security numbers, addresses and other information. Those taxpayers were required to write “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) reported $1 in AGI in order to file electronically and qualify for advance payments.<a href="#_ftn1" name="_ftnref1">1</a> <hr> Planning Point: The IRS Child Tax Credit Update Portal provides information about the client’s eligibility for advance child tax credit payments and information about how those payments are made. Clients can use this portal to set up direct deposit payments, change their bank account information and provide information about any changes to their income. Taxpayers who do not elect direct deposit will receive a paper check. Clients can also use the portal to elect to stop receiving advance payments and instead claim their entire child tax credit in a lump sum when they file their 2021 tax returns. Married couples who elect to unenroll must each separately unenroll. If only one spouse enrolls, the other will continue to receive 50% of the otherwise available monthly child tax credit. Clients may wish to unenroll if they do not anticipate qualifying for the payment based on their 2021 income or if they would prefer to receive a larger tax refund. <hr> With the exception of 2021, the child tax credit is available for each “qualifying child” (defined below) of eligible taxpayers who meet certain income requirements. The child tax credit is $1,000 ($2,000 for tax years beginning after 2017 and before 2026, see below).<a href="#_ftn2" name="_ftnref2">2</a> Additional Rules for Tax Years Beginning After 2017 and Before 2026 An expanded $2,000 child tax credit is available for tax years beginning after 2017 and before 2026 ($1,400 of this per-child credit is refundable). The taxpayer must include the Social Security number for each child for which the refundable portion of the child tax credit is claimed.<a href="#_ftn3" name="_ftnref3">3</a> The $1,400 refundable is indexed for inflation and rounded to the next multiple of $100 ($1,700 for 2024, see Editor’s Note, above).<a href="#_ftn4" name="_ftnref4">4</a> A new family tax credit was created to allow for a $500 nonrefundable credit for dependent parents and other non-child dependents (the requirement for furnishing a Social Security number does not apply to this family tax credit).<a href="#_ftn5" name="_ftnref5">5</a> <hr> Planning Point: For purposes of the definition of “dependent” for this provision, the exemption amount (which was otherwise reduced to zero for 2018-2025) will be treated as though it remained at the pre-reform $4,150 amount in 2018, $4,200 in 2019, $4,300 in 2020-2021, $4,400 in 2022, $4,700 in 2023, $5,000 in 2024 and $X,XXX in 2025.<a href="#_ftn6" name="_ftnref6">6</a> <hr> The credit will phase out for taxpayers with AGI of $400,000 (joint returns) or $200,000 (all other filers). The phase out amounts are not indexed for inflation.<a href="#_ftn7" name="_ftnref7">7</a> As is the case with the suspension of the personal exemption, these provisions are set to expire after 2025. The term qualifying child means a “qualifying child” of the taxpayer (as defined under IRC Section 152(c) – see below) who has not attained the age of seventeen.<a href="#_ftn8" name="_ftnref8">8</a> “Qualifying child” means, with respect to any taxpayer for any taxable year, an individual: (1)  who is the taxpayer’s “child” (see below) or a descendant of such a child, or the taxpayer’s brother, sister, stepbrother, or stepsister or a descendant of any such relative; (2)  who has the same principal place of abode as the taxpayer for more than one-half of the taxable year; and (3)      who has not provided over one-half of such individual’s own support for the calendar year in which the taxpayer’s taxable year begins.<a href="#_ftn9" name="_ftnref9">9</a> Additionally, a qualifying child must be either a citizen or a resident of the United States.<a href="#_ftn10" name="_ftnref10">10</a> The term “child” means an individual who is: (1) a son, daughter, stepson, or stepdaughter of the taxpayer; or (2) an “eligible foster child” of the taxpayer.<a href="#_ftn11" name="_ftnref11">11</a> An “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment decree, or other order of any court of competent jurisdiction.<a href="#_ftn12" name="_ftnref12">12</a> Any adopted children of the taxpayer are treated the same as natural born children.<a href="#_ftn13" name="_ftnref13">13</a> The amount of the credit is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds certain levels. A taxpayer’s MAGI is his adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. Prior to 2018, the credit amount was reduced by $50 for every $1000, or fraction thereof, by which the taxpayer’s MAGI, exceeds the following threshold amounts: $110,000 for married taxpayers filing jointly, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately.<a href="#_ftn14" name="_ftnref14">14</a> Prior to 2018, the child tax credit was refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000 (previously, this amount was $10,000; see below).<a href="#_ftn15" name="_ftnref15">15</a> For example, if the taxpayer’s earned income is $16,000, the excess amount would be $13,000 ($16,000 – $3,000 = $13,000), and the taxpayer’s refundable credit for one qualifying child would be $1,950 ($13,000 × 15 percent = $1,950). For families with three or more qualifying children, the credit was refundable to the extent that the taxpayer’s Social Security taxes exceeded the taxpayer’s earned income credit if that amount was greater than the refundable credit based on the taxpayer’s earned income in excess of $3,000.<a href="#_ftn16" name="_ftnref16">16</a> The previously applicable $10,000 income floor was indexed for inflation. ARRA 2009 reduced the dollar amount to $3,000 for 2009 through 2012.<a href="#_ftn17" name="_ftnref17">17</a> ATRA extended the $3,000 floor amount through 2017, and the PATH Act made this provision permanent.<a href="#_ftn18" name="_ftnref18">18</a> See above for the rules governing the credit from 2018-2026. (Prior to 2001, the child tax credit was refundable only for individuals with three or more qualifying children.)<a href="#_ftn19" name="_ftnref19">19</a> The nonrefundable child tax credit can be claimed against the individual’s regular income tax and alternative minimum tax (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="758">758</a>). The nonrefundable child tax credit cannot exceed the excess of (i) the sum of the taxpayer’s regular tax plus the alternative minimum tax over (ii) the sum of the taxpayer’s nonrefundable personal credits (other than the child tax credit, adoption credit, and saver’s credit) and the foreign tax credit for the taxable year.<a href="#_ftn20" name="_ftnref20">20</a> For tax years beginning after 2001, the refundable child tax credit need not be reduced by the amount of the taxpayer’s alternative minimum tax.<a href="#_ftn21" name="_ftnref21">21</a> The nonrefundable credit must be reduced by the amount of the refundable credit.<a href="#_ftn22" name="_ftnref22">22</a> Some additional restrictions applying to the child tax credit include: (1) an individual’s tax return must identify the name and taxpayer identification number (Social Security number) of the child for whom the credit is claimed; and (2) the credit may be claimed only for a full taxable year, unless the taxable year is cut short by the death of the taxpayer.<a href="#_ftn23" name="_ftnref23">23</a> For purposes of applying a uniform method of determining when a child attains a specific age, the Service has ruled that a child attains a given age on the anniversary of the date that the child was born (e.g., a child born on January 1, 1987, attains the age of 17 on January 1, 2004).<a href="#_ftn24" name="_ftnref24">24</a> The IRS stated that it would apply Revenue Ruling 2003-72 retroactively and would notify those taxpayers entitled to a refund for 2002 as a result of Revenue Ruling 2003-72.<a href="#_ftn25" name="_ftnref25">25</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. Rev. Proc. 2021-24. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 24(a). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 24(h)(7). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 24(h). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 24(h)(4). <a href="#_ftnref6" name="_ftn6">6</a>. Notice 2018-70, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34 <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 24(h)(3). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 24(c)(1). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 152(c). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 24(c)(2). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 152(f)(1). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 152(f)(1)(C). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 152(f)(1)(B). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 24(b)(2). <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 24(d)(1)(B)(i). <a href="#_ftnref16" name="_ftn16">16</a>.  IRC § 24(d)(1). <a href="#_ftnref17" name="_ftn17">17</a>.  IRC § 24(d)(3). <a href="#_ftnref18" name="_ftn18">18</a>.  ATRA, § 103. <a href="#_ftnref19" name="_ftn19">19</a>.  IRC § 24(d), prior to amendment by EGTRRA 2001. <a href="#_ftnref20" name="_ftn20">20</a>.  IRC § 24(b)(3). <a href="#_ftnref21" name="_ftn21">21</a>.  IRC § 24(d). <a href="#_ftnref22" name="_ftn22">22</a>.  IRC § 24(d)(1). <a href="#_ftnref23" name="_ftn23">23</a>.  IRC §§ 24(e), 24(f). <a href="#_ftnref24" name="_ftn24">24</a>.  Rev. Rul. 2003-72, 2003-2 CB 346. <a href="#_ftnref25" name="_ftn25">25</a>.  IRS Information Letter INFO-2003-0215 (8-29-2003). </div></div>

March 13, 2024

762 / What is the Lifetime Learning Credit?

<div class="Section1">The Lifetime Learning Credit is available to certain eligible taxpayers who pay qualified tuition and related expenses.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> The Lifetime Learning Credit is available in an amount equal to 20 percent of “qualified tuition and related expenses” (defined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="761">761</a>) paid by the taxpayer during the taxable year for any course of instruction at an “eligible educational institution” (defined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="761">761</a>) taken to acquire or improve the job skills of the taxpayer, his spouse or dependents. The Lifetime Learning Credit is a per taxpayer credit and the maximum credit available does not vary with the number of students in the family. The maximum amount of the credit is $2,000 (20 percent of up to $10,000 of qualified tuition and related expenses).<a href="#_ftn2" name="_ftnref2">2</a> Qualified tuition and related expenses, for the purposes of the Lifetime Learning Credit, include expenses for graduate as well as undergraduate courses. The Lifetime Learning Credit applies regardless of whether the individual is enrolled on a full-time, half-time, or less than half-time basis. Additionally, the Lifetime Learning Credit is available for an unlimited number of taxable years.<a href="#_ftn3" name="_ftnref3">3</a> Where taxpayers had pre-paid their child’s tuition in November 2001 for the academic period that began during the first three months of the following taxable year (i.e., the spring semester of 2002), the prepayment amount was properly includable in the calculation of the taxpayers’ Lifetime Learning Credit for the 2001 taxable year, not the 2002 taxable year.<a href="#_ftn4" name="_ftnref4">4</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="761">761</a> for a discussion of the Hope Scholarship (American Opportunity) Credit and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="763">763</a> for a discussion of the limitations and phaseouts that apply to both credits. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 25A. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 25A(c); Treas. Reg. § 1.25A-4(a). <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. §§ 1.25A-4(b), 1.25A-4(c). <a href="#_ftnref4" name="_ftn4">4</a>.  Patel v. Commissioner, TC Summ. Op. 2006-40. </div></div>

March 13, 2024

764 / What is the credit for nonbusiness energy property that may be taken against the tax?

<div class="Section1">Editor’s Note: The credit for nonbusiness energy property initially expired on December 31, 2007, but has been revived by Congress several times. As of the date of this publication, this provision has been renamed, expanded and extended through 2032 by the Inflation Reduction Act of 2022. See heading below for details.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> An individual taxpayer may claim as a credit an amount equal to the sum of: (1) 10 percent of the amount paid or incurred by the taxpayer for “qualified energy efficiency improvements” (see below) installed during the taxable year; and (2) the amount of the “residential energy property expenditures” (see below) paid or incurred by the taxpayer during the taxable year.<a href="#_ftn2" name="_ftnref2">2</a> Qualified energy efficiency improvements means any energy efficient “building envelope component” (see below) that meets certain energy conservation criteria, if: (1) the component is installed in or on a dwelling located in the United States that is owned and used by the taxpayer as his principal residence; (2) original use of the component commences with the taxpayer; and (3) the component reasonably can be expected to remain in use for at least five years.<a href="#_ftn3" name="_ftnref3">3</a> The term “building envelope component” means: (1) any insulation material or system specifically and primarily designed to reduce the heat loss or gain of a dwelling when installed in or on the dwelling; (2) exterior windows, including skylights; (3) exterior doors; and (4) metal roofs if the roof has appropriate coatings specifically and primarily designed to reduce the heat gain of the dwelling.<a href="#_ftn4" name="_ftnref4">4</a> In guidance, the Service clarified that a component will be treated as reasonably expected to remain in use for at least five years if the manufacturer offers, at no extra charge, at least a two-year warranty providing for repair or replacement of the component in the event of a defect in materials or workmanship. However, if the manufacturer does not offer such a warranty, all relevant facts and circumstances are taken into account in determining whether the component reasonably can be expected to remain in use for at least five years. The Service also confirmed that a taxpayer may rely on a manufacturer’s certification that a building envelope component is an “eligible building envelope component.” A taxpayer is not required to attach the certification to the tax return on which the credit is claimed, but should retain the certification statement as part of his records. In addition, the Service stated that a credit is allowed only for amounts paid or incurred to purchase the components, not for the onsite preparation, assembly, or original installation of the components.<a href="#_ftn5" name="_ftnref5">5</a> Residential energy property expenditures means expenditures made by the taxpayer for “qualified energy property” that is: (1) installed on or in connection with a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence; and (2) originally placed in service by the taxpayer.<a href="#_ftn6" name="_ftnref6">6</a> The term “qualified energy property” means: (1) “energy-efficient building property” (see below); (2) a qualified natural gas, propane, oil furnace or hot water boiler; or (3) an advanced main air circulating fan. All of the types of property listed in the preceding sentence must meet certain performance and quality standards.<a href="#_ftn7" name="_ftnref7">7</a> “Energy efficient building property” means: (1) electric heat pump water heaters; (2) electric heat pumps; (3) geothermal heat pumps; (4) central air conditioners; and (5) natural gas, propane, or oil water heaters.<a href="#_ftn8" name="_ftnref8">8</a> The Service has confirmed that a taxpayer may rely on a manufacturer’s certification that a product is “qualified energy property.” A taxpayer is not required to attach the certification to the tax return on which the credit is claimed, but should retain the certification statement as part of his records. In addition, the Service stated that a credit is allowed for amounts paid or incurred to purchase qualified energy property and for expenditures for labor costs allocable to the onsite preparation, assembly, or original installation of the property.<a href="#_ftn9" name="_ftnref9">9</a> The Service has issued additional guidance regarding the credit.<a href="#_ftn10" name="_ftnref10">10</a> Prior to 2023, the lifetime limitation with respect to any taxpayer for any taxable year was $500.<a href="#_ftn11" name="_ftnref11">11</a> An additional limit of $200 applied to windows.<a href="#_ftn12" name="_ftnref12">12</a> Other limits were as follows: advanced main air circulating fans – $50; qualified natural gas, propane, oil furnace or hot water boilers – $150; and energy-efficient building property – $300.<a href="#_ftn13" name="_ftnref13">13</a> The credit is available for property placed in service after December 31, 2005, and before January 1, 2008, and in 2009 through 2021. (See Editor’s Note above and the discussion of the Inflation Reduction Act below for details on the credit’s expansion beginning in 2023.)<a href="#_ftn14" name="_ftnref14">14</a> Inflation Reduction Act of 2022 The Inflation Reduction Act renamed the pre-existing IRC Section 25C nonbusiness energy property tax credit the “Energy Efficient Home Improvement Credit.” While the nonbusiness energy property tax credit technically expired at the end of 2021, the bill retroactively extended the existing credit through 2022. Beginning in 2023, the new and expanded Energy Efficient Home Improvement Credit is available through the 2032 tax year. However, beginning with the 2023 tax year, the credit will be expanded to equal to 30% of the costs of eligible home improvements made during the year. Home improvements such as insulation, roofing, windows and other energy-efficient home improvements will continue to be covered under the new rules if they satisfy certain energy rating standards. The credit will also be expanded to cover the cost of additional energy-efficient property, including electric panels and related equipment, biomass stoves and home-energy auditing. Roofing and air-circulating fans will be removed from the list of qualifying improvements. The existing lifetime limits will be replaced with a more generous $1,200 annual limit and the $200 limitation for windows will be eliminated entirely. The annual limits for specific types of qualifying home improvements will also be modified beginning in 2023. The new limits will be: (1) $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, biomass stoves and boilers, (2) $600 for central air conditioners, exterior windows and skylights, electric panels and related equipment, natural gas, propane or oil water heaters, natural gas, propane or oil furnaces or hot water boilers, (3) $250 for exterior doors (with a cap of $500 for all exterior doors installed) and (4) $150 for home energy audits. The tax credit applies in the year the project is installed—and installations must meet certain energy-related standards and criteria, which can vary from project to project (it is expected that future regulations will provide more specific details). The credit isn’t refundable—meaning that it cannot generate a tax refund—but the credit can be carried forward to subsequent tax years to offset future tax liability.<a href="#_ftn15" name="_ftnref15">15</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 25C(g), as amended by EIEA 2008, ARRA, ATRA, the Bipartisan Budget Act of 2018, and FCAA 2020. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 25C(a). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 25C(c)(1). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 25C(c)(2). <a href="#_ftnref5" name="_ftn5">5</a>. Notice 2006-26, 2006-11 IRB 622. <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 25C(d)(1). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 25C(d)(2). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 25C(d)(3). <a href="#_ftnref9" name="_ftn9">9</a>. Notice 2006-26, 2006-11 IRB 622. <a href="#_ftnref10" name="_ftn10">10</a>. Notice 2006-71, 2006-34 IRB 316 (clarifying the effective dates); Notice 2006-53, 2006-25 IRB 1180 (clarifying that exterior siding does not qualify as an eligible building envelope component). <a href="#_ftnref11" name="_ftn11">11</a>. IRC § 25C(b)(1). <a href="#_ftnref12" name="_ftn12">12</a>. IRC § 25C(b)(2). <a href="#_ftnref13" name="_ftn13">13</a>. IRC § 25C(b)(3). <a href="#_ftnref14" name="_ftn14">14</a>. IRC § 25C(g), as amended by FCAA 2020. <a href="#_ftnref15" name="_ftn15">15</a>. IRC § 25C, as modified by Inflation Reduction Act § 13301. </div>

March 13, 2024

766 / What is the alternative motor vehicle credit that may be taken against the tax?

<div class="Section1">Editor’s Note: See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="767">767</a> for information on the expanded tax credit for clean vehicles under the Inflation Reduction Act.<div class="Section1"> The alternative motor vehicle credit is equal to the sum of: (A) the new qualified fuel cell motor vehicle credit; (B) the new advanced lean burn technology motor vehicle credit; (C) the new qualified hybrid vehicle credit; (D) the new qualified alternative motor vehicle credit; and (E) the plug-in conversion credit.<a href="#_ftn1" name="_ftnref1">1</a> (This credit replaces the prior deduction for qualified clean-fuel vehicle property, which sunset on December 31, 2005.)<a href="#_ftn2" name="_ftnref2">2</a> (A) The new qualified fuel cell motor vehicle credit is based on the weight of the vehicle, and ranges from $8,000 (8,500 pounds maximum) to $40,000 (over 26,000 pounds).<a href="#_ftn3" name="_ftnref3">3</a> The amount determined above with respect to a passenger automobile or light truck is increased if the vehicle achieves certain fuel efficiencies, ranging from $1,000 to $4,000.<a href="#_ftn4" name="_ftnref4">4</a> The credit for passenger automobiles and light trucks can be as much as $12,000. The term “new qualified fuel cell motor vehicle” means a motor vehicle: (1) propelled by power derived from one or more fuel cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel that is stored on board the vehicle in any form and may or may not require reformation prior to use; (2) that, in the case of a passenger vehicle or light truck, has received a certificate that the vehicle meets certain emission levels; (3) the original use of which begins with the taxpayer; (4) that is acquired for use or lease by the taxpayer and not for resale; and (5) that is made by a manufacturer.<a href="#_ftn5" name="_ftnref5">5</a> (B) The amount of the new advanced lean burn technology motor vehicle credit is based on fuel economy, and ranges from $400 to $2,400. The amount of the credit is increased by the conservation credit (based on lifetime fuel savings), and ranges from $250 to $1,000.<a href="#_ftn6" name="_ftnref6">6</a> The credit for passenger automobiles and light trucks can be as much as $3,400. The term “advanced lean burn technology motor vehicle” means a passenger automobile or light truck: (1) with an internal combustion engine that (i) is designed to operate primarily using more air than is necessary for complete combustion of the fuel, (ii) incorporates direct injection, (iii) achieves at least 125 percent of the 2002 model year city fuel economy, and (iv) for 2004 and later model vehicles, has received a certificate that the vehicle meets or exceeds certain emission standards; (2) the original use of which begins with the taxpayer; (3) is acquired for use or lease by the taxpayer and not for resale; and (4) is made by a manufacturer.<a href="#_ftn7" name="_ftnref7">7</a> (C) The new qualified hybrid motor vehicle credit amount is determined as follows: (1) If the new qualified hybrid motor vehicle is a passenger automobile or light truck weighing no more than 8,500 pounds, the credit amount is the sum of the fuel economy amount and the conservation credit (see (B), above).<a href="#_ftn8" name="_ftnref8">8</a> (2) For other motor vehicles, the credit amount is equal to the applicable percentage of the “qualified incremental hybrid cost” (i.e., the excess of the manufacturer’s suggested retail price for such vehicle over the price for a comparable gas or diesel powered vehicle) of the vehicle as certified.<a href="#_ftn9" name="_ftnref9">9</a> The credit for passenger automobiles and light trucks can be as much as $3,400. A “new qualified hybrid motor vehicle” means a motor vehicle that: (1) draws propulsion energy from onboard sources of stored energy that are both (i) an internal combustion or heat engine using consumable fuel, and (ii) a rechargeable energy storage system; (2) has been certified as meeting specified emission standards; (3) has maximum available power meeting certain percentages based on weight; (4) the original use of which begins with the taxpayer; (5) is acquired for use or lease by the taxpayer; and (6) is made by a manufacturer.<a href="#_ftn10" name="_ftnref10">10</a> (D) The new qualified alternative fuel motor vehicle credit is an amount equal to the applicable percentage of the incremental cost of any new qualified alternative fuel motor vehicle.<a href="#_ftn11" name="_ftnref11">11</a> The “applicable percentage” is 50 percent, plus 30 percent if the vehicle has been certified as meeting certain emission standards.<a href="#_ftn12" name="_ftnref12">12</a> The “incremental cost” (i.e., the excess of the manufacturer’s suggested retail price for the vehicle over the price for a gas or diesel powered vehicle of the same model) cannot exceed $5,000 to $40,000 based on the weight of the vehicle.<a href="#_ftn13" name="_ftnref13">13</a> “New qualified alternative fuel motor vehicle” means any motor vehicle: (1) that is only capable of operating on an alternative fuel; (2) the original use of which begins with the taxpayer; (3) is acquired by the taxpayer for use or lease but not for resale; and (4) is made by a manufacturer.<a href="#_ftn14" name="_ftnref14">14</a> “Alternative fuel” means compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85 percent of the volume of which consists of methanol.<a href="#_ftn15" name="_ftnref15">15</a> Certifications and Limitations for Hybrid Vehicles Certifications. The tax credit for hybrid vehicles may be as much as $3,400 for those who purchase the most fuel-efficient vehicles. (For the guidance used by manufacturers in certifying credit amounts, see Notice 2006-9.)<a href="#_ftn16" name="_ftnref16">16</a> The Service cautions that even though a manufacturer has certified a vehicle, taxpayers must meet the following requirements to qualify for the credit: (1)  The vehicle must be placed in service after December 31, 2005, and purchased on or before December 31, 2009.<a href="#_ftn17" name="_ftnref17">17</a> (2)  The original use of the vehicle must begin with the taxpayer claiming the credit. (a)  The credit may only be claimed by the original owner of a new, qualifying, hybrid vehicle and does not apply to a used hybrid vehicle. (3)  The vehicle must be acquired for use or lease by the taxpayer claiming the credit. (a)  The credit is only available to the original purchaser of a qualifying hybrid vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit. (b)  For qualifying vehicles used by a tax-exempt entity, the person who sold the qualifying vehicle to the person or entity using the vehicle is eligible to claim the credit, but only if the seller clearly discloses in a document to the tax-exempt entity the amount of credit. (4)  The vehicle must be used predominantly within the United States. Limitations. There is a limit on the number of new qualified hybrid and advanced lean burn technology vehicles eligible for the credit. The phaseout period begins with the second calendar quarter following the calendar quarter that includes the first date on which the number of qualified vehicles manufactured by the manufacturer is at least 60,000.<a href="#_ftn18" name="_ftnref18">18</a> The Service publishes notices providing the adjusted credit amount based on the actual number of vehicles sold for the applicable quarter. Effective dates. The credits are in effect as follows: new qualified fuel cell motor vehicle credit (2006-2021);<a href="#_ftn19" name="_ftnref19">19</a> (B) new advanced lean burn technology motor vehicle credit (2006-2010); (C) new qualified hybrid vehicle credit (2006-2009); and (D) new qualified alternative fuel motor vehicle credit (2006-2010). </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 30B(a). <a href="#_ftnref2" name="_ftn2">2</a>. See § 1348, ETIA 2005; IRC § 179A. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 30B(b)(1). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 30B(b)(2). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 30B(b)(3). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 30B(c)(2). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 30B(c)(3). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 30B(d)(2)(A). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 30B(d)(2)(B). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 30B(d)(3). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 30B(e)(1). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 30B(e)(2). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 30B(e)(3). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 30B(e)(4)(A). <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 30B(e)(4)(B). <a href="#_ftnref16" name="_ftn16">16</a>.  2006-6 IRB 413. <a href="#_ftnref17" name="_ftn17">17</a>.  IRC § 30B(k)(3). <a href="#_ftnref18" name="_ftn18">18</a>.  IRC § 30B(f). <a href="#_ftnref19" name="_ftn19">19</a>.  IRC 30B(k)(1) as amended by FCAA 2020. </div></div>

March 13, 2024

759 / Who qualifies for the tax credit for the elderly and the permanently and totally disabled and how is the credit computed?

<div class="Section1">The credit is available to taxpayers age 65 or older, or those who are under age 65, retired on disability, and were considered permanently and totally disabled when they retired.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> <blockquote>“An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require.”<a href="#_ftn2" name="_ftnref2">2</a></blockquote> The credit equals 15 percent of an individual’s IRC Section 22 amount for the taxable year, but may not exceed the amount of tax. This IRC Section 22 base amount is $5,000 for a single taxpayer or married taxpayers filing jointly if only one spouse qualifies for the credit; $7,500 for married taxpayers filing jointly if both qualify; and $3,750 for a married taxpayer filing separately.<a href="#_ftn3" name="_ftnref3">3</a> Married taxpayers must file a joint return to claim the credit, unless they lived apart for the entire taxable year.<a href="#_ftn4" name="_ftnref4">4</a> This base figure is limited for individuals under age 65 to the amount of the disability income (taxable amount an individual receives under an employer plan as wages or payments in lieu of wages for the period he is absent from work on account of permanent and total disability) received during the taxable year.<a href="#_ftn5" name="_ftnref5">5</a> (Proof of continuing permanent and total disability may be required.)<a href="#_ftn6" name="_ftnref6">6</a> For married taxpayers who are both qualified and who file jointly, the base figure cannot exceed the total of both spouses’ disability income if both are under age 65 or if only one is under age 65, the sum of $5,000 plus the disability income of the spouse who is under 65.<a href="#_ftn7" name="_ftnref7">7</a> The base figure (or the amount of disability income in the case of individuals under age 65, if lower) is reduced dollar-for-dollar by one-half of adjusted gross income in excess of $7,500 (single taxpayers), $10,000 (joint return), or $5,000 (married filing separately).<a href="#_ftn8" name="_ftnref8">8</a> A reduction is also made for Social Security and railroad retirement benefits that are excluded from gross income, and certain other tax-exempt income.<a href="#_ftn9" name="_ftnref9">9</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 22(b). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 22(e)(3). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 22(c). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 22(e)(1). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 22(c)(2)(B)(i). <a href="#_ftnref6" name="_ftn6">6</a>. GCM 39269 (8-2-84). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 22(c)(2)(B)(ii). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 22(d). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 22(c)(3). </div>

March 13, 2024

761 / What is the Hope Scholarship (American Opportunity) Credit?

<div class="Section1">The Hope Scholarship (American Opportunity) Credit is available to certain eligible taxpayers who pay qualified tuition and related expenses.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> The Hope Scholarship (American Opportunity) Credit provides a credit for each eligible student equal to the sum of: (1) 100 percent of qualified tuition and related expenses up to $2,000; plus (2) 25 percent of qualified tuition and related expenses in excess of $2,000, up to the applicable limit. The applicable limit ($4,000) is two times the $2,000 amount.<a href="#_ftn2" name="_ftnref2">2</a> AARA 2009 increased the credit amounts for 2009 and 2010 (later extended through 2012 and again early in 2013 by the American Taxpayer Relief Act of 2012 (“ATRA”) through 2017. This treatment was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH)).<a href="#_ftn3" name="_ftnref3">3</a> In earlier years, the amounts used to calculate the credit were adjusted for inflation and rounded to the next lowest multiple of $100.<a href="#_ftn4" name="_ftnref4">4</a> The maximum credit is now $2,500 ($2,000 + (25 percent × $2,000). The credit is available for four years of postsecondary education (this provision was made permanent by PATH and applies for 2009 and thereafter), and can be used in only four taxable years.<a href="#_ftn5" name="_ftnref5">5</a> To qualify for the credit, the student must carry at least half of a full-time academic workload for an academic period during the taxable year.<a href="#_ftn6" name="_ftnref6">6</a> An eligible student generally means a student who: (1) for at least one academic period beginning in the calendar year, is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential and is enrolled in one of the first four years of postsecondary education (two years prior to 2009), and (2) is free of any conviction for federal or state felony offenses consisting of the possession of a controlled substance.<a href="#_ftn7" name="_ftnref7">7</a> Qualified tuition and related expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer (for whom he is allowed a dependency exemption) at an “eligible education institution.”<a href="#_ftn8" name="_ftnref8">8</a> Qualified tuition and related expenses do not include nonacademic fees such as room and board, medical expenses (including required student health fees), transportation, student activity fees, athletic fees, insurance expenses, and similar personal, living or family expenses unrelated to a student’s academic course of instruction.<a href="#_ftn9" name="_ftnref9">9</a> Additionally, qualified tuition and related expenses do not include expenses for a course involving sports, games or hobbies, unless it is part of the student’s degree program.<a href="#_ftn10" name="_ftnref10">10</a> AARA 2009 expanded qualified tuition and related expenses to include required course materials, and PATH made this provision permanent. An eligible educational institution generally means a postsecondary educational institution that: (a) provides an educational program for which it awards a bachelor’s degree, or a two-year program that would be accepted for credit towards a bachelor’s degree; (b) has at least a one year program that trains students for gainful employment in a recognized profession; (c) participates in a federal financial aid program under Title IV of the Higher Education Act of 1965 or is certified by the Department of Education as eligible to participate in such a program; or (d) meets requirements for certain postsecondary vocational, proprietary institutions of higher learning and certain institutions outside the United States. In any event, the institution must also be accredited or have been granted pre-accreditation status.<a href="#_ftn11" name="_ftnref11">11</a> An academic period means a quarter, semester, trimester or other period of study (such as summer school session) as reasonably determined by an eligible educational institution.<a href="#_ftn12" name="_ftnref12">12</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="763">763</a> for a discussion of the limitations and phaseouts applicable to the American Opportunity Credit. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 25A. <a href="#_ftnref2" name="_ftn2">2</a>. IRC §§ 25A(b)(1), 25A(b)(4); Treas. Reg. § 1.25A-3(a). <a href="#_ftnref3" name="_ftn3">3</a>. ATRA, § 103. <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 25A(h)(1). <a href="#_ftnref5" name="_ftn5">5</a>. Treas. Reg. § 1.25A-3(c). <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 25A(b)(2); Treas. Reg. § 1.25A-3(d)(ii). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 25A(b)(3); Notice 97-60, 1997-2 CB 310 (§ 1, A3); Treas. Reg. § 1.25A-3(d)(1). <a href="#_ftnref8" name="_ftn8">8</a>. Treas. Reg. § 1.25A-2(d)(1). <a href="#_ftnref9" name="_ftn9">9</a>. Treas. Reg. § 1.25A-2(d)(3). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 25A(f)(1); Treas. Reg. § 1.25A-2(d)(5). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 25A(f)(2); HEA 1965 § 481; Treas. Reg. § 1.25A-2(b). <a href="#_ftnref12" name="_ftn12">12</a>.  Treas. Reg. § 1.25A-2(c). </div></div>

March 13, 2024

763 / What limitations and phaseouts apply to the Hope Scholarship (American Opportunity) and Lifetime Learning Credits?

<div class="Section1">Editor’s Note: for tax years beginning after December 31, 2020, the Hope Scholarship (American Opportunity) and Lifetime Learning Credits are phased out for taxpayers with modified adjusted gross income (MAGI) in excess of $80,000 ($160,000 for joint returns). The phaseout range is not adjusted for inflation for tax years beginning after December 31, 2020.<div class="Section1"> The Code sets forth special rules coordinating the interaction of the Hope Scholarship (American Opportunity) and Lifetime Learning Credits. The Lifetime Learning Credit is not available with respect to a student for whom an election is made to take the Hope Scholarship Credit during the same taxable year.<a href="#_ftn1" name="_ftnref1">1</a> However, the taxpayer may use the American Opportunity Credit for one student and the Lifetime Learning Credit for other students in the same taxable year. Both credits are subject to the same phaseout rules based on the taxpayer’s MAGI. MAGI is the taxpayer’s adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. The maximum credit in each case is reduced by the credit multiplied by a ratio. Prior to 2021, for single taxpayers, the ratio equals the excess of (i) the taxpayers’ MAGI over $40,000 to (ii) $10,000. For married taxpayers filing jointly, the ratio equals (a) the excess of the taxpayer’s MAGI over $80,000 to (b) $20,000.<a href="#_ftn2" name="_ftnref2">2</a> The $40,000 and $80,000 amounts are adjusted for inflation and rounded to the next lowest multiple of $1,000.<a href="#_ftn3" name="_ftnref3">3</a> For 2020, the threshold amounts were $59,000 for single taxpayers and $118,000 for married taxpayers filing jointly for the Lifetime Learning Credit. For 2019, the threshold amounts were $58,000 for single taxpayers and $116,000 for married taxpayers filing jointly. For 2018, the threshold amounts were $57,000 for single taxpayers and $114,000 for married taxpayers filing jointly. The threshold amounts for the American Opportunity Credit are $160,000 for married taxpayers filing jointly and $80,000 for single taxpayers for tax years after 2020. The amount of qualified tuition and related expenses for both credits is limited by the sum of the amounts paid for the benefit of the student, such as scholarships, education assistance advances, and payments (other than a gift, bequest, devise, or inheritance) received by an individual for educational expenses attributable to enrollment.<a href="#_ftn4" name="_ftnref4">4</a> The IRS has determined that qualified tuition and related expenses paid with distributions of educational benefits from a trust could be used to compute American Opportunity and Lifetime Learning Credits if the distributions were included in the taxable income of the beneficiaries.<a href="#_ftn5" name="_ftnref5">5</a> Neither credit is allowed unless a taxpayer elects to claim it on a timely filed (including extensions) federal income tax return for the taxable year in which the credit is claimed. The election is made by completing and attaching Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to the return.<a href="#_ftn6" name="_ftnref6">6</a> Neither credit is allowed unless the taxpayer provides the name and the taxpayer identification (i.e., Social Security) number of the student for whom the credit is claimed.<a href="#_ftn7" name="_ftnref7">7</a> If the student is claimed as a dependent on another individual’s tax return (e.g., parents) he cannot claim either credit for himself, even if he paid the expenses himself.<a href="#_ftn8" name="_ftnref8">8</a> (The Service has privately ruled that a student was entitled to claim a Hope Scholarship Credit on his own return even though his parents were eligible to claim him as a dependent, but chose not to do so.<a href="#_ftn9" name="_ftnref9">9</a>) However, if another individual is eligible to claim the student as a dependent, but does not do so, only the student may claim the Hope or Lifetime Learning Credit for his own qualified tuition and related expenses.<a href="#_ftn10" name="_ftnref10">10</a> Both credits are unavailable to married taxpayers filing separately.<a href="#_ftn11" name="_ftnref11">11</a> Neither of these credits is allowed for any expenses for which there is a deduction available.<a href="#_ftn12" name="_ftnref12">12</a> Taxpayers are not eligible to claim an American Opportunity or Lifetime Learning Credit and the deduction for qualified higher education expenses in the same year with respect to the same student.<a href="#_ftn13" name="_ftnref13">13</a> A taxpayer may claim an American Opportunity or Lifetime Learning Credit and exclude distributions from a qualified tuition program on behalf of the same student in the same taxable year if the distribution is not used to pay the same educational expenses for which the credit was claimed.<a href="#_ftn14" name="_ftnref14">14</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="687">687</a>. A taxpayer can claim an American Opportunity or Lifetime Learning Credit and exclude distributions from a Coverdell Education Savings Account (ESA – see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="681">681</a>) on behalf of the same student in the same taxable year if the distribution is not used to pay the same educational expenses for which the credit was claimed.<a href="#_ftn15" name="_ftnref15">15</a> A taxpayer may elect not to have the American Opportunity or Lifetime Learning Credit apply with respect to the qualified higher education expenses of an individual for any taxable year.<a href="#_ftn16" name="_ftnref16">16</a> Reporting. For the reporting requirements for higher education tuition and related expenses, see IRC Section 6050S.<a href="#_ftn17" name="_ftnref17">17</a> For the reporting requirements for qualified tuition and related expenses, see Treasury Regulation Section 1.6050S-1; TD 9029.<a href="#_ftn18" name="_ftnref18">18</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 25A(c)(2)(A); Treas. Reg. § 1.25A-1(b). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 25A(d); Treas. Reg. § 1.25A-1(c). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 25A(h)(2); Treas. Reg. § 1.25A-1(c)(3). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 25A(g)(2); Treas. Reg. § 1.25A-5(c). <a href="#_ftnref5" name="_ftn5">5</a>. Let. Rul. 9839037. <a href="#_ftnref6" name="_ftn6">6</a>. Treas. Reg. § 1.25A-1(d). <a href="#_ftnref7" name="_ftn7">7</a>. Treas. Reg. § 1.25A-1(e). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 25A(g)(3); Treas. Reg. § 1.25A-1(f)(1). <a href="#_ftnref9" name="_ftn9">9</a>. Let. Rul. 200236001. <a href="#_ftnref10" name="_ftn10">10</a>.  Treas. Reg. § 1.25A-1(f)(1). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 25A(g)(6); Treas. Reg. § 1.25A-1(g). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 25A(g)(5); Treas. Reg. § 1.25A-5(d). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 222(c)(2)(A). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 529(c)(3)(B)(v). <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 530(d)(2)(C). <a href="#_ftnref16" name="_ftn16">16</a>.  IRC § 25A(e). <a href="#_ftnref17" name="_ftn17">17</a>.  As amended by P.L. 107-131 (1-16-2002). <a href="#_ftnref18" name="_ftn18">18</a>.  67 Fed. Reg. 77678 (12-19-02). See also Notice 2006-72, 2006-36 IRB 363. </div></div>

March 13, 2024

765 / What is the Residential Clean Energy Credit that may be taken against the tax?

<div class="Section1">Editor’s Note: The Inflation Reduction Act also renamed the existing residential energy efficient property credit the “Residential Clean Energy Credit.” The new law expanded the parameters of the credit and extended it through 2034. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>.<div></div><div>An individual taxpayer may claim as a credit an amount equal to the sum of 30 percent of the following expenditures made by the taxpayer during the taxable year: (1) “qualified solar electric property” (see below); (2) “qualified solar water heating property” (see below); (3) “qualified fuel cell property” (see below); (4) qualified small wind energy property (see below); and (5) qualified geothermal heat pump property (see below).<a href="#_ftn1" name="_ftnref1">1</a> Solar water heating property must be certified in order for the credit to be claimed.<a href="#_ftn2" name="_ftnref2">2</a> The Protecting Americans from Tax Hikes Act of 2015 (PATH) modified the applicable percentage used to determine the amount of the credit for tax years after 2019. In 2020, the applicable percentage was reduced to 26 percent, and was scheduled to decrease to 23 percent by 2023. The Inflation Reduction Act modified these percentage limits so that the credit amount increases to</div><div class="Section1"> 30 percent from 2022 to 2032. It then decreases to 26 percent for 2033 and 22 percent for 2034. The credit is set to expire after 2034. “Qualified solar water heating property expenditure” means an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun. The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer. “Qualified fuel cell property expenditure” means an expenditure for qualified fuel cell property (as defined in IRC Section 48(c)(1)) installed on or in connection with a dwelling unit located in the United States and used as a principal residence by the taxpayer. “Qualified small wind energy property expenditure” means an expenditure for property which uses a wind turbine to generate electricity for use in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. “Qualified geothermal heat pump property expenditure” means an expenditure for qualified geothermal heat pump property installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.<a href="#_ftn3" name="_ftnref3">3</a> A special rule provides that expenditures allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than the function of storage cannot be taken into account for these purposes.<a href="#_ftn4" name="_ftnref4">4</a> The maximum credit allowed for any taxable years before 2009 cannot exceed $2,000 with respect to qualified solar water heating property expenditures, $500 with respect to each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) for which qualified fuel cell property expenditures are made, $500 with respect to each half kilowatt of capacity (not to exceed $4,000) of wind turbines for which qualified small wind energy property expenditures are made, and $2,000 with respect to any qualified geothermal heat pump property expenditures.<a href="#_ftn5" name="_ftnref5">5</a> For tax years starting in 2009, the only remaining limit is the $500 limit for each half-kilowatt of capacity of fuel cell plants. The unused portion of the credit can be carried forward to the succeeding taxable year.<a href="#_ftn6" name="_ftnref6">6</a> The credit is generally available for property placed in service after December 31, 2005 and before January 1, 2024.<a href="#_ftn7" name="_ftnref7">7</a> The reduced rates prescribed by PATH apply to property placed into service after 2016 under the Bipartisan Budget Act of 2018. Under the Inflation Reduction Act of 2022, the credit will no longer be allowed for biomass furnaces or water heaters. It will be expanded to include battery storage technology that has a capacity of not less than three kilowatt hours. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 25D(a). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 25D(b)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 25D(d). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 25D(e)(3). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 25D(b). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 25D(c). <a href="#_ftnref7" name="_ftn7">7</a>.  See § 1333, Energy Policy Act of 2005; IRC § 25D(g). </div></div>

March 13, 2024

767 / What tax credits are available for plug-in electric vehicles?

<div class="Section1"> Editor’s Note: The Inflation Reduction Act expanded and extended the clean vehicle tax credit for tax years beginning after 2022. The rules discussed immediately below applied for vehicles placed in service during 2022. The ARRA modified the credit for qualified plug-in electric drive vehicles purchased after December 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer’s vehicles after the manufacturer has sold at least 200,000 vehicles.<a href="#_ftn1" name="_ftnref1">1</a> ARRA also creates a special tax credit for two types of plug-in vehicles—certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2014. The Protecting Americans from Tax Hikes Act extended this credit for two-wheeled vehicles through 2016, and BBA 2018 extended the credit through 2017. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable. Inflation Reduction Act The Inflation Reduction Act expands the electric vehicle tax credit for electric vehicles placed into service after December 31, 2022 for ten years, through 2032. Taxpayers who buy qualifying vehicles will qualify for a tax credit of up to $7,500 for new vehicles. For used electric vehicles, the maximum credit will equal $4,000 or 30% of the vehicle’s cost, whichever is less. Used electric vehicles only qualify if they’re purchased for personal use, rather than for resale. <hr /> Planning Point: Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase. Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies. <hr /> The exact amount of the available credit will depend on various factors, including whether minerals in the vehicle’s battery are sourced from qualifying countries and where the vehicle is assembled. Taxpayers who purchase a vehicle where 40% of the critical minerals used in the battery are sourced from a qualifying country could be eligible for a $3,750 tax credit. Beginning in 2023, 50% of the battery’s components must be assembled or manufactured in North America to qualify for the remaining $3,750 credit. <hr /> Planning Point: The percentage limitations will increase over time, which could make it more difficult to find a qualifying vehicle unless manufacturers modify their processes. <hr /> The clean vehicle tax credit itself was also expanded so that it covers more types of vehicles, to include any new qualified fuel cell motor vehicle. The term “qualifying plug-in electric driver motor” in IRC Section 30D was replaced with the term “clean”. That means qualifying vehicles are expanded to include more than qualified plug-in electric drive vehicles, so that, for example, hydrogen cell fuel cars will qualify. To claim the tax credit, the taxpayer must include the vehicle’s VIN number on their tax return for the year. The expanded tax credit applies to vehicles placed into service after 2022 (note that clients who have written binding contracts in 2022 will qualify if the vehicle is placed into service in 2023). If the vehicle was purchased in 2022, the old rules for claiming the credit applied. Taxpayers must ensure that the vehicle was assembled by a qualified manufacturer. Qualified manufacturers are those that enter into approved agreements with the IRS and supply the IRS with VIN numbers that can be matched to the VIN reported on a taxpayer’s return. Income Limits and Restrictions. The newly expanded electric vehicle tax credits are intended to provide benefits for lower- and middle-income clients. As such, they come with income restrictions and limitations. The credit is unavailable for single taxpayers who earn more than $150,000 per year, joint filers who earn more than $300,000 per year and heads-of-households who earn $225,000 per year or more. Certain luxury electric vehicles are also excluded. If the manufacturer’s suggested retail price (MSRP) on an SUV, van or truck is over $80,000, the purchaser is not entitled to the credit. The credit is unavailable if the MSRP on a car is over $55,000. If the vehicle was used (defined as at least two years old), the cost of the pre-owned vehicle cannot exceed $25,000. There are also restrictions on where the vehicle was manufactured. To qualify, final assembly of the clean vehicle must have occurred in North America. That requirement is effective as of August 16, 2022 (the date the Inflation Reduction Act was signed into law). Further, a certain amount of the minerals used in the vehicle’s battery must be sourced from North America or certain other countries that have free trade agreements with the U.S. The term “final assembly” is defined to mean the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. Starting in 2023, however, existing sales caps will be removed so that automakers who currently offer electric vehicles can produce more electric vehicles. Prior to the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles did not qualify for the credit. <hr /> Planning Point: Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase. Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies. <hr /> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 30D. </div>

March 13, 2024

758 / What credits may be taken against the tax?

<div class="Section1">Editor’s Note: Many of the credits listed below contain sunset provisions so that they apply only so long as Congress chooses to renew them from year to year. Congress historically acts late in the year to extend many credits and extender provisions (see below for more details).<div class="Section1"> As of the date of this revision and with respect to provisions that are not permanent, Congress has not indicated whether it will extend various tax credits for future years.<a href="#_ftn1" name="_ftnref1">1</a> Applicable extension periods are noted in the discussion below. After rates have been applied to compute the tax, certain payments and credits may be subtracted from the tax to arrive at the amount of tax payable. Refundable credits are recoverable regardless of the amount of the taxpayer’s tax liability for the taxable year. The refundable credits include: …Taxes withheld from salaries and wages.<a href="#_ftn2" name="_ftnref2">2</a> …Overpayments of tax.<a href="#_ftn3" name="_ftnref3">3</a> …The excess of Social Security withheld (two or more employers).<a href="#_ftn4" name="_ftnref4">4</a> …The earned income credit.<a href="#_ftn5" name="_ftnref5">5</a> <hr> Planning Point: For 2020 and 2021 only, IRS guidance allowed taxpayers who are eligible for the credit to calculate the earned income tax credit using 2019 earned income if it was higher than 2021 earned income, even if they did not have any earned income in 2021. Taxpayers who did not file a return or claim the earned income tax credit for 2020 or 2021 can file an amended return to take advantage of the relief. However, the IRS was clear to note that these taxpayers cannot use their 2020 income to calculate their 2021 earned income tax credit.<a href="#_ftn6" name="_ftnref6">6</a> <hr> … A portion of the child tax credit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="760">760</a>). … A portion of the American Opportunity credit. …The 72.5 percent health care tax credit for uninsured workers displaced by trade competition.<a href="#_ftn7" name="_ftnref7">7</a> …The unused long-term minimum tax credit. The nonrefundable credits are as follows: …The personal credits—which consist of the child and dependent care credit;<a href="#_ftn8" name="_ftnref8">8</a> the credit for the elderly and the permanently and totally disabled;<a href="#_ftn9" name="_ftnref9">9</a> the qualified adoption credit;<a href="#_ftn10" name="_ftnref10">10</a> the nonrefundable portion of the child tax credit (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="760">760</a>);<a href="#_ftn11" name="_ftnref11">11</a> the American Opportunity, Hope Scholarship, and Lifetime Learning credits<a href="#_ftn12" name="_ftnref12">12</a> (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="761">761</a>); the credit for elective deferrals and IRA contributions (the “saver’s credit,” which became permanent under PPA 2006);<a href="#_ftn13" name="_ftnref13">13</a> …The Energy Efficient Home Improvement Credit, previously called the “nonbusiness energy property credit” (extended through 2032);<a href="#_ftn14" name="_ftnref14">14</a> and the Residential Clean Energy Credit, previously called the residential energy efficient property credit (extended through 2034).<a href="#_ftn15" name="_ftnref15">15</a> …Other nonbusiness credits.<a href="#_ftn16" name="_ftnref16">16</a> …The general business credit (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7884">7884</a>) is the sum of the following credits determined for the taxable year: (1) the investment credit determined under IRC Section 46 (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7893">7893</a>) (including the rehabilitation credit; see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7808">7808</a>); (2) the work opportunity credit determined under IRC Section 51(a) extended through 2025); (3) the alcohol fuels credit determined under IRC Section 40(a); (4) the research credit (made permanent by PATH) determined under IRC Section 41(a); (5) the low-income housing credit (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7801">7801</a>) determined under IRC Section 42(a); (6) the enhanced oil recovery credit (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7884">7884</a>) under IRC Section 43(a); (7) in the case of an eligible small business, the disabled access credit determined under IRC Section 44(a); (8) the renewable electricity production credit under IRC Section 45(a) (extended only through 2009 under EIEA 2008); (9) the empowerment zone employment credit determined under IRC Section 1396(a) (extended through 2025); (10) the Indian employment credit as determined under IRC Section 45A(a) (extended through 2021); (11) the employer Social Security credit determined under IRC Section 45B(a); (12) the orphan drug credit determined under IRC Section 45C(a) (as modified by the 2017 tax reforms); (13) the new markets tax credit determined under IRC Section 45D(a) (extended through 2025); (14) in the case of an eligible employer (as defined in IRC Section 45E(c)); the small employer pension plan startup cost credit determined under IRC Section 45E(a); (15) the employer-provided child care credit determined under IRC Section 45F(a); (16) the railroad track maintenance credit determined under IRC Section 45G(a) (made permanent by the 2021 CAA, although the credit was reduced from 50 percent to 40 percent); (17) the biodiesel fuels credit determined under IRC Section 40A(a) (extended through 2024); (18) the low sulfur diesel fuel production credit determined under IRC Section 45H(a); (19) the marginal oil and gas well production credit determined under IRC Section 45I(a); (20) for tax years beginning after September 20, 2005, the distilled spirits credit determined under IRC Section 5011(a); (21) for tax year beginning after August 8, 2005, the advanced nuclear power facility production credit determined under IRC Section 45J(a); (22) for property placed in service after December 31, 2005, the nonconventional source production credit determined under IRC Section 45K(a); (23) the energy efficient home credit determined under IRC Section 45L(a) (extended through 2032); (24) the energy efficient appliance credit determined under IRC Section 45M(a) (extended through 2014); (25) the portion of the alternative motor vehicle credit to which IRC Section 30B(g)(1) applies; and (26) the portion of the alternative fuel vehicle refueling property credit to which IRC Section 30C(d)(1) applies (extended through 2032).<a href="#_ftn17" name="_ftnref17">17</a> Under the Inflation Reduction Act, if applicable wage and apprenticeship requirements are met, the maximum credit is 30% for depreciable alternative fuel vehicle refueling property. Otherwise, it is limited to 6% in cases involving depreciable alternative fuel vehicle refueling property (and the credit for depreciable alternative fuel vehicle refueling property cannot exceed $100,000). For all other qualifying property, the limit is $1,000. (These credit limitations apply on a per-item basis, rather than a cumulative basis).<a href="#_ftn18" name="_ftnref18">18</a> ETIA 2005 provides an alternative motor vehicle credit for qualified fuel cell vehicles, advanced lean-burn technology vehicles, qualified hybrid vehicles, and qualified alternative fuel vehicles.<a href="#_ftn19" name="_ftnref19">19</a> (This credit replaced the prior deduction for qualified clean-fuel vehicle property, which expired on December 31, 2005.)<a href="#_ftn20" name="_ftnref20">20</a> The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation is treated as a portion of the general business credit; the remainder of the credit is a personal credit allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the alternative minimum tax for the taxable year.<a href="#_ftn21" name="_ftnref21">21</a> For new qualified plug-in electric drive motor vehicles acquired and placed in service after 2009, a credit is available. The credit can vary from $2,500 to $7,500 depending on battery capacity (and subject to phaseout based on number of vehicles sold by the manufacturer). The portion of the credit attributable to property of a character subject to an allowance for depreciation is treated as part of the general business credit. The balance of the credit is generally treated as a nonrefundable personal credit.<a href="#_ftn22" name="_ftnref22">22</a> An alternative credit is available for certain plug-in electric cars placed in service after February 17, 2009 and before 2022. This credit is equal to 10 percent of cost, up to $2,500.<a href="#_ftn23" name="_ftnref23">23</a>  The Inflation Reduction Act extended this tax credit through 2032 and expanded its availability. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="767">767</a> for details. First-Time Homebuyer Credit There was a first-time homebuyer credit available for a home purchased after April 8, 2008 and through April 2010.<a href="#_ftn24" name="_ftnref24">24</a> The credit was available for 10 percent of the purchase price, up to certain limits: <ul> <li>For homes purchased in 2009 and 2010, the dollar limits were $8,000 ($4,000 for a married individual filing separately).</li> <li>For a home purchased after November 6, 2009 by a long-time resident treated as a first-time homebuyer, the dollar limit was only $6,500 ($3,250 for a married individual filing separately).</li> <li>For a home purchased before November 7, 2009, the credit was phased out based on AGI of $75,000 to $95,000 ($150,000 to $170,000 for a joint return).</li> <li>For a home purchased after November 6, 2009, the credit was phased out based on AGI of $125,000 to $145,000 ($225,000 to $245,000 for a joint return).</li> </ul> For a home purchased after November 6, 2009, the credit was not available to a person for whom a personal exemption was allowable to another person. The credit was not available for a home purchased after November 6, 2009 if the purchase price exceeded $800,000. For a home purchased in 2008, the credit must generally be recaptured over a fifteen-year period beginning with the second year after the home is purchased. The recapture is accelerated if the home is sold or is no longer the taxpayer’s principal residence. Credit recapture does not apply to a home purchased in 2009 or 2010 unless the home was disposed of, or ceases to be used as a primary residence, within three years of purchase. For a first-time homebuyer’s credit that can be properly claimed in a year after 2008, the taxpayer can elect to claim the credit as of December 31 of the previous year. Making Work Pay Credit For 2009 and 2010, a “making work pay” credit was available equal to the lesser of (1) 6.2 percent of earned income or (2) $800 for a joint return and $400 for all others. The credit was reduced by 2 percent of the taxpayer’s modified adjusted gross income in excess of $150,000 for a joint return and $75,000 for all others. The credit was also reduced by certain other benefits provided by ARRA 2009. The credit was not available for nonresident aliens, for persons for whom a personal exemption was claimed on another person’s return, or an estate or trust.<a href="#_ftn25" name="_ftnref25">25</a> Child and Dependent Care Credit The child and dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses (a dependent who is a child must be under age 13 to qualify). Those expenses can include the cost of physically caring for the dependent—and also include household expenses, such as hiring someone to help with cooking and cleaning for a dependent, as long as the expenses are primarily for the benefit of the dependent. For 2021 only, the dependent care tax credit was fully refundable under the American Rescue Plan Act (ARPA). The maximum credit percentage was increased from 35 percent to 50 percent of qualifying dependent care expenses (the credit phases down to 20 percent for taxpayers with income between $125,000 and $183,000). The level of qualifying dependent care expenses also increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents. The IRS released FAQ to help taxpayers understand the expanded child and dependent care tax credit in 2021. To claim the credit, taxpayers were required to have earnings. The FAQ is clear that the amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings. Additionally, the taxpayer must subtract employer-provided dependent care benefits, including those provided through a flexible spending account, from total work-related expenses when calculating the credit. As in prior years, the more a taxpayer earned, the lower the percentage of work-related expenses that were taken into account in determining the credit. However, the credit was fully refundable for the first time in 2021. An eligible taxpayer could receive the credit even if they owed no federal income tax. To be eligible for the refundable credit, a taxpayer (or the taxpayer’s spouse on a joint return) was required to reside in the United States for more than half of the year. To claim the credit for 2021, taxpayers completed Form 2441, Child and Dependent Care Expenses, and included the form when filing tax returns in 2022. In completing the form to claim the 2021 credit, the taxpayer had to provide a valid taxpayer identification number (TIN) for each qualifying person. Usually, this is the qualifying person’s Social Security number. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.    Pub. Law No. 115-123. <a href="#_ftnref2" name="_ftn2">2</a>.    IRC § 31(a). <a href="#_ftnref3" name="_ftn3">3</a>.    IRC § 35. <a href="#_ftnref4" name="_ftn4">4</a>.    Treas. Reg. § 1.31-2. <a href="#_ftnref5" name="_ftn5">5</a>.    IRC § 32. <a href="#_ftnref6" name="_ftn6">6</a>.    IRS FAQ, available at https://www.irs.gov/newsroom/irs-updates-questions-and-answers-about-the-tax-year-2021-earned-income-tax-credit. <a href="#_ftnref7" name="_ftn7">7</a>.    IRC § 35. <a href="#_ftnref8" name="_ftn8">8</a>.    IRC § 21. <a href="#_ftnref9" name="_ftn9">9</a>.    IRC § 22. <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 23. <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 24. <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 25A, as amended by ATRA, § 103. <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 25B. <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 25C, as amended by ATRA, § 401 and extended by the Tax Certainty and Disaster Relief Act of 2020. <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 25D. <a href="#_ftnref16" name="_ftn16">16</a>.  IRC §§ 53, 901. <a href="#_ftnref17" name="_ftn17">17</a>.  IRC § 38(b). <a href="#_ftnref18" name="_ftn18">18</a>.  IRC § 30C, as amended by the Inflation Reduction Act. <a href="#_ftnref19" name="_ftn19">19</a>.  IRC § 30B. <a href="#_ftnref20" name="_ftn20">20</a>.  See § 1348, ETIA 2005; IRC § 179A. <a href="#_ftnref21" name="_ftn21">21</a>.  IRC § 30B(g). <a href="#_ftnref22" name="_ftn22">22</a>.  IRC § 30D, as amended by ARRA 2009. <a href="#_ftnref23" name="_ftn23">23</a>.  IRC § 30, as amended by ARRA 2009, ATRA and the Tax Certainty and Disaster Relief Act of 2020. <a href="#_ftnref24" name="_ftn24">24</a>.  IRC § 36, as added by HERA 2008 and amended by ARRA 2009 and WHBAA 2009. <a href="#_ftnref25" name="_ftn25">25</a>.   IRC § 36A, as amended by ARRA 2009. </div></div>