Tax credit
Encyclopedia
A tax credit is a sum deducted from the total amount a taxpayer owes to the state
. A tax
credit may be granted for various types of taxes, such as an income tax
, property tax
, or VAT
. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors. In some systems tax credits are 'refundable' to the extent they exceed the relevant tax. Tax systems may grant tax credits to businesses or individuals, and such grants vary by type of credit.
, withholding of tax
at source on payments to nonresidents, and input credits for value added tax
.
Some systems treat payments of certain taxes as refundable payments of other taxes in specific cases. An example is the U.S. credit for Federal highway use tax paid with respect to gasoline or diesel fuel for vehicle use off highways, which may be claimed as a payment of on federal income tax returns.
’ and ‘working tax credit
’ are paid directly into the claimant's bank account or Post Office Card Account - in exceptional circumstances these can be paid by cashcheque
however payments may stop if account details are not provided . A minimum level of child tax credits is payable to all individuals or couples with children, up to a certain income limit. The actual amount of child tax credits that a person may receive depends on factors such as the level of their income, the number of children they have, the age of the children they are claiming for and the education status of any children over 16. Working tax credit
is paid to single low earners with or without children who are aged 25 or over and are working over 30 hours per week and also to couples without children, at least one of whom is over 25, provided they are working for 30 hours a week combined and at least one of them is working for 16 hours a week. If the claimant has children however, they may claim working tax credit from age 16 upward - provided that they are working at least 16 hours per week.
The U.S. system offers the following nonrefundable family related income tax credits (in addition to a tax deduction
for each dependent child):
The U.S. system has the following nonrefundable credits:
Many sub-Federal jurisdictions (states, counties, cities, etc.) within the U.S. offer income or property tax credits for particular activities or expenditures. Examples include credits similar to the Federal research and employment credits, property tax credits granted by cities (often called abatements) for building facilities within the city, etc. These items often are negotiated between a business and a governmental body, and specific to a particular business and property.
(at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation).
(VAT) in some jurisdictions upon billing or being paid by customers. Where these providers use goods or services provided by others, they may have paid VAT to other providers. Most VAT systems allow the amount of such VAT paid or considered paid to be used to offset VAT payments due, generally referred to as an input credit. Some systems allow the excess of input credits over VAT obligations to be refunded after a period of time.
for foreign income taxes paid on the same income. The credit often is limited based on the amount of foreign income. The credit may be granted under domestic law and/or tax treaty
. The credit is generally granted to individuals and entities, and is generally nonrefundable. See Foreign tax credit
for more comprehensive information on this complex subject.
based on an alternative measure of taxable income. Mexico imposes an IETU based on an alternative measure of taxable income. Italy imposes an alternative tax based on assets. In each case, where the alternative tax is higher than the regular tax, a credit is allowed against future regular tax for the excess. The credit is usually limited in a manner that prevents circularity in the calculation.
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
. A tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
credit may be granted for various types of taxes, such as an income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
, property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
, or VAT
Vat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors. In some systems tax credits are 'refundable' to the extent they exceed the relevant tax. Tax systems may grant tax credits to businesses or individuals, and such grants vary by type of credit.
Credit for payments
Many systems refer to taxes paid indirectly, such as taxes withheld by payers of income, as credits rather than prepayments. In such cases, the tax credit is invariably refundable. The most common forms of such amounts are payroll withholding of income tax or PAYEPAYE
Pay as you earn or PAYE refers to a system of withholding of income tax from payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may also refer to withholding of the...
, withholding of tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
at source on payments to nonresidents, and input credits for value added tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
.
Some systems treat payments of certain taxes as refundable payments of other taxes in specific cases. An example is the U.S. credit for Federal highway use tax paid with respect to gasoline or diesel fuel for vehicle use off highways, which may be claimed as a payment of on federal income tax returns.
Individual income tax credits
Income tax systems often grant a variety of credits to individuals. These typically include credits available to all taxpayers as well as tax credits unique to individuals. Some credits may be offered for a single year only.Low income subsidies
Several income tax systems provide income subsidies to lower income individuals by way of credit. These credits may be based on income, family status, work status, or other factors. Often such credits are refundable when total credits exceed tax liability.United Kingdom
In the United Kingdom, the 'child tax creditChild tax credit
A child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per...
’ and ‘working tax credit
Working tax credit
The Working Tax Credit is a state benefit in the United Kingdom made to people who work on a low income. It is a part of the current system of refundable tax credits introduced in April 2003 and is a means-tested social security benefit...
’ are paid directly into the claimant's bank account or Post Office Card Account - in exceptional circumstances these can be paid by cashcheque
Giro
A Giro or giro transfer is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee...
however payments may stop if account details are not provided . A minimum level of child tax credits is payable to all individuals or couples with children, up to a certain income limit. The actual amount of child tax credits that a person may receive depends on factors such as the level of their income, the number of children they have, the age of the children they are claiming for and the education status of any children over 16. Working tax credit
Working tax credit
The Working Tax Credit is a state benefit in the United Kingdom made to people who work on a low income. It is a part of the current system of refundable tax credits introduced in April 2003 and is a means-tested social security benefit...
is paid to single low earners with or without children who are aged 25 or over and are working over 30 hours per week and also to couples without children, at least one of whom is over 25, provided they are working for 30 hours a week combined and at least one of them is working for 16 hours a week. If the claimant has children however, they may claim working tax credit from age 16 upward - provided that they are working at least 16 hours per week.
United States
The U.S. system grants the following low income tax credits:- Earned income credit: this refundable credit is granted for a percentage of income earned by a low income individual. The credit is calculated and capped based on the number of qualifying children, if any. This credit is indexed for inflation and phased out for incomes above a certain amount. For 2009, the maximum credit was $5,657.
- Credit for the elderly and disabled: A nonrefundable credit up to $1,125
- Retirement savings credit: a nonrefundable credit of up to 50% of contributions to IRAs or similar plans, phased out at incomes above $16,000 ($24,000 for head of household and $32,000 for joint returns).
- Mortgage interest credit: a nonrefundable credit that may be limited to $2,000, granted under specific mortgage programs.
Family relief
Some systems grant tax credits for families with children. These credits may be on a per child basis or as a credit for child care expenses.The U.S. system offers the following nonrefundable family related income tax credits (in addition to a tax deduction
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
for each dependent child):
- child creditChild tax creditA child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per...
: a credit up to $1,000 per qualifying child. - Child and dependent care creditChild and Dependent Care CreditThe Household and Dependent Care Credit is a nonrefundable tax credit available to United States taxpayers. Taxpayers that care for a qualifying individual are eligible. The purpose of the credit is to allow the taxpayer to be gainfully employed. This credit is created by 26 U.S.C...
: a credit up to $6,000, phased out at incomes above $15,000. - Credit for adoption expenses: a credit up to $10,000, phased out at higher incomes.
Education, energy and other subsidies
Some systems indirectly subsidize education and similar expenses through tax credits.The U.S. system has the following nonrefundable credits:
- Two mutually exclusive credits for qualified tuition and related expenses. The Hope creditHope CreditThe United States federal HOPE Tax credit is a nonrefundable education tax credit of up to $1,800 for each eligible student. Students in a qualified Midwestern disaster area may receive up to $3,600...
is 100% of the first $1,200 and 50% of the next $1,200 of qualified tuition expenses per year for up to two years. The Lifetime Learning Credit is 20% of the first $10,000 of cumulative expenses. These credits are phased out at incomes above $50,000 ($100,000 for joint returns) in 2009. Expenses for which a credit is claimed are not eligible for tax deductionTax deductionIncome tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
. - First time homebuyers credit up to $7,500.
- Credits for purchase of certain nonbusiness energy property and residential energy efficiency. Several credits apply with differing rules.
Business tax credits
Many systems offer various incentives for businesses to make investments in property or operate in particular areas. Credits may be offered against income or property taxes, and are generally nonrefundable to the extent they exceed taxes otherwise due. The credits may be offered to individuals as well as entities. The nature of the credits available varies highly by jurisdiction.United States
U.S. income tax has numerous nonrefundable business credits. In most cases, any amount of these credits in excess of current year tax may be carried forward to offset future taxes, with limitations. The credits include the following, available to individuals and businesses:- Alternative motor vehicle credit: several credits are available for purchase of varying types of non-gasoline powered vehicles.
- Alternative fuel credits: a credit based on the amount of production of certain non-petroleum fuels.
- Disaster relief credits
- Credits for employing individuals in certain areas or those formerly on welfare or in targeted groups
- Credit for increasing research expensesResearch & Experimentation Tax CreditInternal Revenue Code §41 known as the Research & Experimentation Tax Credit or the R&D Tax Credit is a general business tax credit for companies that are incurring R&D expenses in the United States. The R&D Tax Credit was originally introduced in the Economic Recovery Tax Act of 1981 sponsored by...
- A variety of industry specific credits
Many sub-Federal jurisdictions (states, counties, cities, etc.) within the U.S. offer income or property tax credits for particular activities or expenditures. Examples include credits similar to the Federal research and employment credits, property tax credits granted by cities (often called abatements) for building facilities within the city, etc. These items often are negotiated between a business and a governmental body, and specific to a particular business and property.
Federal nonrefundable investment tax credits
Tax credits, while they come in many forms, are authorized incentives under the Internal Revenue Code (and some state tax codes) to implement public policy. Congress, in an effort to encourage the private sector to provide a public benefit, allows a participating taxpayer a dollar for dollar reduction of their tax liability for investments in projects that probably would not occur but for the credits.Federal Historic Rehabilitation Tax Credit
The legislative incentive program to encourage the preservation of “historical buildings”. Congress instituted a two-tier Tax Credit incentive under the 1986 Tax Reform Act. A 20% credit is available for the rehabilitation of historical buildings and a 10% credit is available for non-historic buildings, which were first placed in service before 1936. Benefits are derived from tax credits in the year the property is placed in service, cash flow over 6 years and repurchase options in year six.Renewable Energy/Investment Tax Credit (ITC)
This investment tax credit varies depending on the type of renewable energy project; solar, fuel cells ($1500/0.5 kW) and small wind (< 100 kW) are eligible for credit of 30% of the cost of development, with no maximum credit limit; there is a 10% credit for geothermal, microturbines (< 2 MW) and combined heat and power plants (< 50 MW). The ITC is generated at the time the qualifying facility is placed in service. Benefits are derived from the ITC, accelerated depreciation, and cash flow over a 6-8 year period.Renewable Energy/Production Tax Credit (PTC)
Under present law, an income tax credit of 2.1 cents/kilowatt-hour is allowed for the production of electricity from utility-scale wind turbines, geothermal, solar, hydropower, biomass and marine and hydrokinetic renewable energy plants. This incentive, the renewable energy Production Tax Credit (PTC), was created under the Energy Policy Act of 1992Energy Policy Act of 1992
The Energy Policy Act is a United States government act.It was passed by Congress and addressed energy efficiency, energy conservation and energy management , natural gas imports and exports , alternative fuels and requiring certain fleets to acquire alternative fuel vehicles, which are capable of...
(at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation).
Low Income (Affordable) Housing Tax Credit (LIHTC)
Under this program, created in the 1986 Tax Reform Act, the U.S. Treasury Department allocates tax credits to each state based on that states population. These credits are then awarded to developers who, together with an equity partner, develop and maintain apartments as affordable units. Benefits are derived primarily from the tax credits over a 10 year period.Qualified School Construction Bond (QSCB)
QSCBs are U.S. debt instruments used to help schools borrow at nominal rates for the rehabilitation, repair and equipping of their facilities, as well as the purchase of land upon which a public school will be built. A QSCB holder receives a Federal tax credit in lieu of an interest payment. The tax credits may be stripped from QSCB bonds and sold separately. QSCBs were created by Section 1521 of the American Recovery and Reinvestment Act of 2009. Internal Revenue Code Section 54F also addresses QSCBs.Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit providing incentives to employers for hiring groups facing high rates of unemployment, such as veterans, youths and others. WOTC helps these targeted groups obtain employment so they are able to gain the skills and experience necessary to obtain better future job opportunities. The WOTC is based on the number of hours an employee works and benefits the employer directly. Foss and Company has been successful in developing a structure whereby passive third-party investors may take the tax credit benefit.State tax credits
Approximately 43 states provide a variety of special incentive programs that utilize state tax credits. These include Brownfield credits, Film Production credits, Renewable energy credits, Historic Preservation credits and others. The amount of credit, the term of credit and the cost of the credit differs from state to state. These credits can be either in the form of a certificate, which can be purchased as an asset, or in a more traditional pass through entity. The tax credits can generally be used against insurance company premium tax, bank tax and income tax.Value added tax
Resellers or producers of goods or providers of services (collectively, providers) must collect value added taxValue added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(VAT) in some jurisdictions upon billing or being paid by customers. Where these providers use goods or services provided by others, they may have paid VAT to other providers. Most VAT systems allow the amount of such VAT paid or considered paid to be used to offset VAT payments due, generally referred to as an input credit. Some systems allow the excess of input credits over VAT obligations to be refunded after a period of time.
Foreign tax credit
Income tax systems that impose tax on residents on their worldwide income tend to grant a foreign tax creditForeign tax credit
Income tax systems that tax residents on worldwide income generally offer a foreign tax credit to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction...
for foreign income taxes paid on the same income. The credit often is limited based on the amount of foreign income. The credit may be granted under domestic law and/or tax treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
. The credit is generally granted to individuals and entities, and is generally nonrefundable. See Foreign tax credit
Foreign tax credit
Income tax systems that tax residents on worldwide income generally offer a foreign tax credit to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction...
for more comprehensive information on this complex subject.
Credits for alternative tax bases
Several tax systems impose a regular income tax and, where higher, an alternative tax. The U.S. imposes an alternative minimum taxAlternative Minimum Tax
The Alternative Minimum Tax is an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold . This exemption is substantially higher than the...
based on an alternative measure of taxable income. Mexico imposes an IETU based on an alternative measure of taxable income. Italy imposes an alternative tax based on assets. In each case, where the alternative tax is higher than the regular tax, a credit is allowed against future regular tax for the excess. The credit is usually limited in a manner that prevents circularity in the calculation.
External links
- Federal Tax Credits for Rehabilitating Historic Buildings:
- http://www.nps.gov/history/hps/tps/tax/index.htm
- Rehabilitation Tax Credit http://www.irs.gov/businesses/small/industries/article/0,,id=97599,00.html
- Affordable Housing Tax Credit
- http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/
- Work Opportunity Tax Credit
- http://www.doleta.gov/business/incentives/opptax/
- Database of State Incentives for Renewables and Efficiency
- http://www.dsireusa.org/
- Department of Energy. Business Tax Incentives.
- http://www.energy.gov/business_tax_incentives.htm