Welcome to Module 9

Tax Credits (Form 1040 Lines 19, 20, 27, through 29, and 31, Schedule 3, Lines 1 through 14)

Tax credits are an integral part of the U.S. tax system, designed by Congress to promote specific social and economic outcomes. These credits are financial incentives to achieve policy goals such as supporting families with children, providing tax relief for low-income taxpayers, encouraging education, incentivizing adoptions, and motivating individuals to participate in the workforce. Understanding how these tax credits function, their classifications, and their implications for taxpayers is crucial for effectively navigating the tax landscape.

Tax credits are financial incentives established under the Internal Revenue Code to achieve specific social and economic goals. They reduce a taxpayer's liability dollar-for-dollar, unlike deductions, which reduce taxable income. Common tax credits include:

Child Tax Credit (IRC §24)
Earned Income Credit (IRC §32)
Education Credits (IRC §25A)
Adoption Credit (IRC §23)
Premium Tax Credit (IRC §36B)

The Purpose of Tax Credits

Tax credits serve to alleviate the financial burdens faced by various demographic groups. For instance, credits aimed at assisting families with children help offset the costs of raising children, promoting family stability and child welfare. Low-income taxpayers benefit from credits that reduce their overall tax liability, alleviating some economic pressures they face. Additionally, education-related tax credits are designed to encourage individuals to pursue further education and skill development, which can lead to better job opportunities and economic mobility.

Moreover, tax credits that incentivize adoptions aim to reduce the financial barriers associated with adopting children, promoting the welfare of children in need of families. By providing financial incentives for employment, these credits can encourage individuals to enter or remain in the workforce, contributing to economic growth and stability.

Types of Tax Credits

Tax credits can generally be classified into two categories: nonrefundable and refundable. Most individual income tax credits are nonrefundable, meaning that if a taxpayer's credits exceed their tax liability, they can reduce the tax owed to zero, but this will not result in a refund for any remaining amount. This structure often limits the benefits for lower-income individuals who may not owe enough tax to utilize these credits fully.

In contrast, refundable tax credits, such as the Earned Income Credit (EIC), allow taxpayers to receive a refund if their credits exceed their tax liability. This characteristic makes refundable credits particularly beneficial for low-income individuals and families, as they can receive additional financial support even without significant tax liability.

Types of Tax Credits:

The two main types of tax credits are refundable and nonrefundable.

Nonrefundable Credits:

These credits reduce tax liability to zero but do not result in a refund for excess amounts. Examples include:

Child Tax Credit (IRC §24, nonrefundable portion)
Lifetime Learning Credit (IRC §25A(c))

Refundable Credits:

These credits allow taxpayers to receive a refund if the credit exceeds their tax liability. Examples include:

Earned Income Credit (IRC §32)
Additional Child Tax Credit (IRC §24(d))
Premium Tax Credit (IRC §36B)

Reporting Tax Credits

Tax credits must be accurately reported to ensure compliance with tax regulations. Most tax credits are reported on Form 1040, specifically on lines 19, 20, 27 through 29, and 31. Additionally, Schedule 3 is utilized for reporting specific tax credits on lines 1 through 14. Some tax credits may necessitate additional forms or schedules for accurate reporting, emphasizing the importance of understanding the tax filing process.

One notable aspect of tax credits is the premium tax credit, which assists individuals and families in obtaining health insurance coverage through the Health Insurance Marketplace. This credit can result in an additional tax on Schedule 2, line 2, or could provide an extra credit on Schedule 3, line 9. Understanding these complexities is essential for taxpayers to maximize their benefits and ensure adherence to tax laws.

Reporting Tax Credits:

Discusses how tax credits are reported on Form 1040 and Schedule 3.

Form 1040:

Tax credits are reported on various lines of Form 1040, including:

Line 19: Child Tax Credit
Line 20: Credit for Other Dependents
Lines 27-29: Refundable credits such as the Earned Income Credit and Additional Child Tax Credit
Line 31: Premium Tax Credit

Schedule 3:

Additional credits are reported on Schedule 3, including:

Line 1: Foreign Tax Credit (IRC §27)
Line 2: Credit for Child and Dependent Care Expenses (IRC §21)
Line 6: Adoption Credit (IRC §23)
Line 9: Net Premium Tax Credit (IRC §36B)
Line 12: Residential Energy Credits (IRC §25D)

Commonly Used Tax Credits

Several widely utilized tax credits are designed to meet specific policy goals. The Child Tax Credit, for example, offers financial support to families with children, enhancing their ability to cover basic living expenses. The American Opportunity Tax Credit (AOTC) incentivizes higher education by allowing students to claim credits for qualified education expenses. The Lifetime Learning Credit further supports ongoing education and skill development, enabling individuals to pursue lifelong learning.

The Earned Income Credit (EIC) is particularly significant for low-income workers, providing substantial financial assistance that can reduce poverty levels. The Adoption Tax Credit encourages families to consider adoption by offsetting some associated costs and promoting child welfare.

Commonly Used Tax Credits:

Commonly used tax credits and their policy goals.

Child Tax Credit (IRC §24):

Provides financial support to families with qualifying children under age 17. The credit includes a refundable portion known as the Additional Child Tax Credit.

Earned Income Credit (IRC §32):

To reduce poverty and incentivize employment, the government offers significant financial assistance to low—and moderate-income workers, especially those with children.

American Opportunity Tax Credit (AOTC) (IRC §25A(b)):

Encourages higher education by providing credit for qualified education expenses during the first four years of college.

Lifetime Learning Credit (IRC §25A(c)):

Supports lifelong education and skill development by providing credit for tuition and related expenses.

Adoption Credit (IRC §23):

Offsets adoption-related expenses, promoting child welfare by reducing the financial barriers to adoption.

Premium Tax Credit (IRC §36B):

Assists individuals and families in affording health insurance through the Health Insurance Marketplace.

Importance of Tax Credits:

Tax credits are critical tools for reducing tax liability and achieving financial goals. They directly lower the amount of tax owed and, in the case of refundable credits, can result in refunds. By understanding the eligibility criteria, reporting requirements, and policy objectives of tax credits, taxpayers can maximize their benefits and ensure compliance with tax laws.

Conclusion

Tax credits play a vital role in shaping economic and social policy in the United States. Individuals can navigate the tax system more effectively by understanding their purpose, types, reporting requirements, and specific examples. Taxpayers must know the available credits and their implications to maximize potential benefits and ensure compliance with tax regulations. As policymakers continue to evaluate and adjust these credits, staying informed will be crucial for making the most of these financial incentives to achieve personal and societal goals.

Key Features and Citations:

Definition of Tax Credits:

Discusses credits such as the Child Tax Credit (IRC §24), Earned Income Credit (IRC §32), and Premium Tax Credit (IRC §36B).

Types of Tax Credits:

Nonrefundable Credits: Examples include the Lifetime Learning Credit (IRC §25A(c)).
Refundable Credits: Examples include the Earned Income Credit (IRC §32) and Additional Child Tax Credit (IRC §24(d)).

Reporting Requirements:

Credits are reported on Form 1040 (lines 19, 20, 27–29, 31) and Schedule 3 (lines 1–14), with specific examples and associated IRC sections.

Commonly Used Tax Credits:

This section discusses credits such as the American Opportunity Tax Credit (IRC §25A(b)), the Adoption Credit (IRC §23), and the Residential Energy Credits (IRC §25D).

Importance:

Highlights how tax credits reduce liability and encourage behaviors aligned with policy goals.

Module Learning Outcomes

Upon successful completion of this module, you will be able to:

1. LO 9-1: Apply the tax rules and accurately calculate the credit for child and dependent care expenses, including determining eligibility and allowable amounts.

2. LO 9-2: Apply the tax rules and calculate the credit for older people or people with disabilities, considering income limits and other requirements.

3. LO 9-3: Apply the tax rules and compute education credits, including the American Opportunity Credit and the Lifetime Learning Credit.

4. LO 9-4: Apply the tax rules and determine the foreign tax credit (FTC), including its limitations and carryover provisions.

5. LO 9-5: Apply the tax rules and calculate the child tax credit, including any additional refundable amounts.

6. LO 9-6: Apply the tax rules and compute the retirement savings contributions credit, considering income thresholds and contribution limits.

7. LO 9-7: Apply the tax rules and calculate the adoption credit, including eligible expenses and phase-out limitations.

8. LO 9-8: Apply the tax rules and compute the Earned Income Credit (EIC), considering eligibility criteria such as income, filing status, and qualifying children.

9. LO 9-9: Apply the tax rules for the premium tax credit under the Affordable Care Act, including eligibility, calculation, and reconciliation requirements.

(CLO = Course Learning Outcome)

To Do

Please read and watch all of the module learning materials (readings, presentations, videos, etc.) and complete all assignments/assessments listed below. If you have questions, please contact the course instructor or ask in the Questions About This Course forum.

Readings and Presentations:

Credit for Child and Dependent Care Expenses (Schedule 3, Line 2 [Form 24411])
Credit for the Elderly or the Disabled (Schedule 3, Line 6d [Schedule R])
Education Credits (Form 1040, Line 29 and Schedule 3, Line 3 [Form 8863])
Foreign Tax Credit (FTC) (Schedule 3, Line 1 [Form 1116])
Child Tax Credit (Form 1040, Line 19 and 28 [Form 8812])
Retirement Savings Contributions Credit (Saver’s Credit) (Schedule 3, Line 4 [Form 8880])
Adoption Credit (Schedule 3, Line 6c [Form 88399])
Earned Income Credit (EIC) (Form 1040, Line 27)
Premium Tax Credit (Schedule 2, Line 2, or Schedule 3, Line 9)
Appendix A: Earned Income Credit (EIC) Table
Appendix B

Lecture, PowerPoint, and Videos:

- Instructor Lecture
- PowerPoint
Accessing CONNECT for Chapter Videos
To fully engage with the content covered in this chapter, accessing CONNECT by clicking on the link provided is essential. By utilizing CONNECT, you will have seamless access to a wealth of supplementary resources and interactive tools to enhance your understanding of the concepts discussed in the videos. This platform will deepen your comprehension and positively impact your overall learning experience. So, take advantage of this valuable opportunity to unlock a wealth of knowledge at your fingertips - access CONNECT today!

Assignments/Assessments:

Discussion Board: Discussion (Chapter 9) - Explain how the foreign tax credit limitation works.
Assignment: For this Chapter's quiz and homework, you must access CONNECT by clicking on the provided link (Chapter 9).

Click the Next ▶ button to continue.