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Investigate These Personal Tax Credits To Save Money

Filed under Federal Taxes. Fact checked on March 21, 2013.

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The income tax code has many tax credits that are available to individuals. The ones discussed below are among those likely to be of interest to small business owners.

Many tax credits, such as education credits or the dependent care credit, are available to individuals, regardless of whether they are employees or small business owners. However, some of these, such as the credit a for prior year's AMT, may merit additional scrutiny if you own a business.

Can You Claim Credit for Prior Year AMT Liability?

Individuals who owe alternative minimum tax (AMT) attributable to items (such as income from the exercise of an incentive stock option) that defer recognition of income, rather than permanently affect taxable income, are permitted to apply their minimum tax credit against their regular tax liability, but only to the extent that their regular liability exceeds their tentative minimum tax.

A portion of the minimum tax credit can be applied against a taxpayer's entire regular tax liability and is refundable. The AMT refundable credit amount is the greater of

  • the lesser of $5,000 or the long-term unused minimum tax credit or
  • 20 percent of the long-term unused minimum tax credit.

The "long-term unused minimum tax credit" for a tax year is the portion of the minimum tax credit attributable to a taxpayer's adjusted net minimum tax for tax years before the third tax year immediately preceding the tax year.

The AMT refundable credit amount is phased out for higher income taxpayers using the same threshold amount and applicable percentage used to phase out personal exemptions. Making the credit refundable provides some relief to individuals who have exercised incentive stock options and subsequently sold the stock at a loss.

The credit is claimed on Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts, or on Form 8827, Credit for Prior Year Minimum Tax - Corporations.

If you have paid AMT in prior years and think you might be eligible for this credit, see your tax adviser. The AMT rules are a morass of confusion, and interpretation of them is best left to professionals.

You May Be Able to Claim the  Foreign Tax Credit

Many business owners, particularly those who are aggressively exporting their products, need to pay foreign taxes.  In addition, you be liable for foreign taxes on profits from overseas operations or investments. If you are in this situation, you can claim a credit for foreign income taxes, or taxes imposed by possessions of the U.S., that you paid or accrued during the tax year.

You can elect to deduct these taxes instead of taking the credit, if you prefer. However, credits are nearly always a better tax-savings bet than deductions, so the credit will generally save you more money.

The credit is claimed on Form 1116, Foreign Tax Credit. Unfortunately, like most credits, it can't be used to reduce your alternative minimum tax (AMT).

Tools to Use

Among the Business Tools are Form 1040 and Form 1116. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.

Residential Energy Efficient Property Credit Remains Available

Through 2016, a tax credit is available to help individual taxpayers pay for residential alternative energy equipment. You can claim a tax credit for 30 percent of the costs you incur for five categories of energy efficient property that you install at your home.

  • qualified solar electric property
  • qualified solar water heating property
  • qualified fuel cell property (limited to no more than $500 for each one-half kilowatt of capacity of the property)
  • qualified small wind energy property
  • qualified geothermal heat pump property

There is is a limit of $500 per half kilowatt of capacity for fuel cell property.

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