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A tax credit is a tax incentive which allows certain taxpayers to lớn subtract the amount of the credit they have accrued from the total they owe the state.^[1] It may also be a credit granted in recognition of taxes already paid or a sườn of state "discount" applied in certain cases. Another way to lớn think of a tax credit is as a rebate.

Refundable vs. non-refundable[edit]

A refundable tax credit is one which, if the credit exceeds the taxes due, the government pays back to lớn the taxpayer the difference.^[2] In other words, it makes possible a negative tax liability.^[3] For example, if a taxpayer has an initial tax liability of $100 and applies a $300 tax credit, then the taxpayer ends with a liability of –$200 and the government refunds to lớn the taxpayer that $200.

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With a non-refundable tax credit, if the credit exceeds the taxes due then the taxpayer pays nothing but does not receive the difference. In this case, the taxpayer from the example would kết thúc with a tax liability of $0 (i.e. they could make use of only $100 of the $300 credit) and the government would not refund the taxpayer the $200 difference.

Credit for payments[edit]

Many systems refer to lớn taxes paid indirectly, such as taxes withheld by payers of income, as credits rather than vãn prepayments. In such cases, the tax credit is invariably refundable. The most common forms of such amounts are payroll withholding of income tax or PAYE, withholding of tax at source on payments to lớn nonresidents, and input credits for value added tax.

Individual income tax credits[edit]

Income tax systems often grant a variety of credits to lớn individuals. These typically include credits available to lớn all taxpayers as well as tax credits unique to lớn individuals. Some credits may be offered for a single year only.

Low income subsidies[edit]

Several income tax systems provide income subsidies to lớn 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[edit]

In the United Kingdom, the Child Tax Credit and Working Tax Credit were paid directly into the claimant's ngân hàng trương mục or Post Office Card Account. In exceptional circumstances, these can be paid by cashcheque (sometimes called giro). However, payments may stop if trương mục details are not provided.^[4] A minimum level of Child Tax Credits is payable to lớn all individuals or couples with children, up to lớn a certain income limit. The actual amount of Child Tax Credits that a person may receive depended on these factors: the level of their income, the number of children they have, whether the children are receiving Disability Living Allowance and the education status of any children over sixteen years of age. Since 2018, Child Tax Credit has been replaced by Universal Credit for most people.

Working Tax Credit is paid to lớn single low earners with or without children who are aged 25 or over and are working over 30 hours per week and also to lớn couples without children, at least one of whom is over 25, provided that at least one of them is working for 30 hours a week. If the claimant has children they could claim Working Tax Credit from age sixteen and up, provided that they are working at least sixteen hours per week.^[5] It is being replaced by Universal Credit.

Tax Credits were capped which many sources claimed affects the poorest families disproportionately. A survey by End Child Poverty estimated that roughly 1.5 million parents have reduced spending on basics lượt thích food and fuel.^[6] According to lớn Gavin Kelly of the Resolution Foundation, tax credits help raise living standards of low paid workers. He wrote in the New Statesman, "Perhaps the biggest misconception is the voguish notion that if tax credits are cut, employers will somehow decide to lớn offer pay rises to lớn fill the gap. This is saloon-bar economics espoused by some on both left and right."^[7]

On 15 September năm ngoái, the House of Commons voted^[8] to lớn decrease Tax Credit thresholds, a law that came into effect on 6 April năm nhâm thìn.^{[9][dubious – discuss]} Opponents claimed that it would harm those on low incomes. Simon Hopkins, Chief Executive of charity Turn2us commented "Today's vote in the House of Commons will mean one thing for many of the poorest working families in the UK; they are going to lớn get poorer. Tax credits are a vital source of income for those on a low wage and for many they làm đẹp a substantial portion of their monthly income."^[10]

The IFS supported the opposition view that the effects of the changes would disproportionately reduce the income of poor families, even taking into trương mục reductions in income tax and an increase in the National Living Wage.^[11] The government responded that the tax credit system had, for too long, been used to lớn subsidise low pay and the changes would bring total expenditure on tax credits back down to lớn more sustainable levels seen in 2007–08.^[8]

On 26 October năm ngoái the House of Lords supported a motion from Baroness Meacher delaying the imposition of the cuts until a new consideration of the effects could be made by the House of Commons.^[12]

United States[edit]

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 năm nhâm thìn, the maximum credit was $6,269 for taxpayers with three or more qualifying children.
• Credit for the elderly and disabled: a nonrefundable credit up to lớn $1,125.
• Retirement savings contribution credit: a nonrefundable credit of up to lớn 50% for up to lớn $2000 of contributions to lớn qualified retirement savings plans, such as IRAs (including the Roth, SEP and IRA), 401(k)/403(b)/457 plans and the Thrift Savings Plan; phased out starting (for the năm trước tax year) at incomes above $18,000 for single returns, $27,000 for heads of household, and $36,000 for joint returns.^[13]
• Mortgage interest credit: a nonrefundable credit that may be limited to lớn $2,000, granted under specific mortgage programs.
• Premium tax credit: this refundable credit is provided to lớn individuals and families who obtain healthcare insurance policies through a healthcare exchange, and whose income falls between 100% and 400% of the applicable federal poverty line. It was first introduced in the năm trước tax year.

Family relief[edit]

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 lớn a tax deduction for each dependent child):

• Child credit: Parents of children who are under age 17 at the kết thúc of the tax year may qualify for a credit up to lớn $1,000 per qualifying child. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.^[14]
• Child and dependent care credit: Taxpayers may claim a credit up to lớn $3,000 of eligible expenses for dependent care for a child under age 13 in order to lớn pursue or maintain gainful employment. If one parent stays trang chính full-time, however, no child care costs are eligible for the credit.
• Credit for adoption expenses: a credit up to lớn $10,000, phased out at higher incomes. Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from their employer for adoption expenses. For 2012, the amount of the credit will decrease to lớn $12,650, and in 2013 to lớn $5,000.^[15] The adoption tax credit encompasses eligible expenses associated with adopting a child, including:
  • Reasonable adoption fees
  • Costs pertaining to lớn adoption attorneys or court fees
  • Qualifying travel expenses, such as meals and lodging incurred during adoption-related travel
  • Other eligible expenses directly tied to lớn the legal adoption process.

Education, energy and other subsidies[edit]

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 American Opportunity Tax Credit is 100% of the first $2,000 and 25% of the next $4000 of qualified tuition expenses per year for up to lớn two years. The Lifetime Learning Credit^[16] 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 deduction.
• First time homebuyers credit up to lớn $7,500 (closing date before Sept. 30, 2010).
• Credits for purchase of certain nonbusiness energy property and residential energy efficiency. Several credits apply with differing rules.^[17]

Business tax credits[edit]

Many systems offer various incentives for businesses to lớn make investments in property or operate in particular areas. Credits may be offered against income or property taxes, and are generally nonrefundable to lớn the extent they exceed taxes otherwise due. The credits may be offered to lớn individuals as well as entities. The nature of the credits available varies highly by jurisdiction.

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United States[edit]

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 lớn offset future taxes, with limitations. The credits include the following (for a full list see section 38 of the Internal Revenue Code):

• Alternative motor vehicle credit: several credits are available for purchase of varying types of non-gasoline powered vehicles.^[18]
• Alternative fuel credits: a credit based on the amount of production of certain non-petroleum fuels.^[19]
• Disaster relief credits^[20]
• Credits for employing individuals in certain areas or those formerly on welfare or in targeted groups
• Credit for Increasing Research Activities
• 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 lớn the Federal research and employment credits, property tax credits, (often called abatements), granted by cities for building facilities within the đô thị, etc. These items often are negotiated between a business and a governmental toàn thân, and specific to lớn a particular business and property.

Federal nonrefundable investment tax credits[edit]

Tax credits, while they come in many forms, are authorized incentives under the Internal Revenue Code (and some state tax codes) to lớn implement public policy. Congress, in an effort to lớn encourage the private sector to lớn 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[edit]

The legislative incentive program to lớn encourage the preservation of "historical buildings". Congress instituted a two-tier Tax Credit incentive under the Tax Reform Act of 1986. 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.^[21]

Renewable Energy/Investment Tax Credit (ITC)[edit]

The investment tax credit is allowed section 48 of the Internal Revenue Code. 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.^[22]

Though phối to lớn expire at the kết thúc of năm ngoái, the ITC for residential solar installations was renewed in December năm ngoái. The credit will continue at 30% through 2018, and will slowly decline to lớn 10% in 2022. The ITC for other technologies (including geothermal) was extended by one year.^[23] Installations will be considered eligible for the ITC based on the date that construction starts.^[24]

Renewable Energy/Production Tax Credit (PTC)[edit]

Section 45 of the Internal Revenue Code allows an income tax credit of 2.3 cents/kilowatt-hour (as adjusted for inflation for 2013^[25]) 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),^[26] was created under the Energy Policy Act of 1992 (at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation).^[27] In late năm ngoái a large majority in Congress voted^[28] to lớn extend the PTC for wind and solar power for 5 years and $25 billion. Analysts expect $35 billion of investment for each type.^[29]

Low Income (Affordable) Housing Tax Credit (LIHTC)[edit]

Under this program, created in the 1986 Tax Reform Act, the U.S. Treasury Department allocates tax credits to lớn each state based on that states population. These credits are then awarded to lớn 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)[edit]

QSCBs are U.S. debt instruments used to lớn 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.

Research & Development Tax Credit[edit]

The Credit For Increasing Research Activities (R&D Tax Credit) is a general business tax credit under Internal Revenue Code Section 41 for companies that incur research and development (R&D) costs in the United States. For most companies, this credit is worth 7–10% of qualified research expenses each year.^[30] It can be used to lớn offset income or payroll taxes, depending on the situation.^[31]

Work Opportunity Tax Credit (WOTC)[edit]

The Work Opportunity Tax Credit (WOTC) is a federal tax credit providing incentives to lớn employers for hiring groups facing high rates of unemployment, such as veterans, youths and others. WOTC helps these targeted groups obtain employment ví they are able to lớn gain the skills and experience necessary to lớn obtain better future job opportunities. The WOTC is based on the number of hours an employee works and benefits the employer directly.

The WOTC was established by the Small Business Job Protection Act of 1996. The WOTC replaced the Targeted Jobs Tax Credit (TJTC), which was created by the Revenue Act of 1978 and was in place from 1978 to lớn 1994. In December năm trước, the WOTC was extended retroactively to lớn the beginning of năm trước by the Tax Increase Prevention Act of năm trước (TIPA), P..L. 113–295.^[32] That act authorized the credit only through December 31, năm trước.^[33] Later, through the Protecting Americans from Tax Hikes Act of năm ngoái (the PATH Act), Congress modified and extended the WOTC through December 31, 2019.^[34]

American Opportunity Tax Credit (AOTC)[edit]

The American Opportunity Tax Credit (AOTC) ^[35] was part of the American Recovery and Reinvestment Act, which was signed into law in February 2009. The AOTC replaced the Hope Scholarship credit for Tax Years 2009 and 2010, increased the benefits for nearly all Hope credit recipients and many other students by providing a maximum benefit up to lớn $2,500 per student, 100 percent of their first $2,000 in tuition and 25 percent of the next $2,000, expanding the income range over which taxpayers can claim a credit, and making the credit partially refundable. Critics have complained that complexity and restrictions on eligibility make the actual benefits per post-secondary student much lower than vãn the theoretical maximum, and that even with tax credits, higher education remains tax-disadvantaged compared to lớn other investments.^[36]

State tax credits[edit]

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 lớn state. These credits can be either in the sườn 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, ngân hàng tax and income tax.

Oregon Residential Energy Tax Credit (RETC)[edit]

The state of Oregon's RETC is a tax credit for solar systems. In năm nhâm thìn, Oregon Governor Kate Brown released a new budget proposal that does not extend the RETC program. In năm ngoái, RETC gave $12.2 million in tax credits; in năm trước, that amount was approximately $4.2 million.^[37] Under the budget proposal, the credit will sunset at the kết thúc of 2017. Extension of the tax credit is a top priority for Oregon's solar industry.^[38]

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Value added tax[edit]

Resellers or producers of goods or providers of services (collectively, providers) must collect value added tax (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 lớn other providers. Most VAT systems allow the amount of such VAT paid or considered paid to lớn be used to lớn offset VAT payments due, generally referred to lớn as an input credit. Some systems allow the excess of input credits over VAT obligations to lớn be refunded after a period of time.

Foreign tax credit[edit]

Income tax systems that impose tax on residents on their worldwide income tend to lớn grant a foreign tax credit 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 lớn individuals and entities, and is generally nonrefundable. See Foreign tax credit for more comprehensive information on this complex subject.

Credits for alternative tax bases[edit]

Several tax systems impose a regular income tax and, where higher, an alternative tax. The U.S. imposes an alternative minimum tax 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 vãn 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.

See also[edit]

• Tax choice

References[edit]

External links[edit]

• Work Opportunity Tax Credit
• Database of State Incentives for Renewables and Efficiency
• TAX CREDITS, REBATES & SAVINGS - Department of Energy. Business Tax Incentives
• Tax credits - Child Poverty kích hoạt Group
• Child Tax Credit