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Part 21. Customer Account Services

Chapter 6. Individual Tax Returns

Section 3. Credits

21.6.3  Credits

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21.6.3.1  (10-01-2002)
Credits Overview

  1. This section provides information on both non-refundable and refundable credits.

21.6.3.2  (10-01-2002)
What Are Credits?

  1. A Non-Refundable Credit is a statutory credit. Non-refundable credits are offset against, and limited to, the amount of the tax liability for the tax year.

    Reminder:

    The unused amounts of adoption, mortgage interest, and District of Columbia first time home buyer's credits, etc. can be carried over from year to year until the credits are absorbed, or the carryforward period expires, whichever is first.

  2. A Refundable Credit, is a credit that can reduce tax liability below zero. Examples of refundable credits are the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit. If the credit(s) exceed the total tax liability, the excess is refundable.

21.6.3.3  (10-01-2002)
Credits Research

  1. Credits are researched on Integrated Data Retrieval System (IDRS), using Command Codes (CC) RTVUE, IMFOLT, or TXMODA.

  2. The tax code permits a wide variety of credits. Follow the procedures below for non-refundable and refundable credits.

21.6.3.4  (02-26-2007)
Credits Procedures

  1. This section contains the procedures for non-refundable and refundable tax credits.

  2. All credits require the primary taxpayer, secondary taxpayer, and, if applicable, the qualifying child(ren) have a valid TIN. See IRM 21.6.3-1, TIN REQUIREMENTS FOR EXEMPTIONS AND CREDITS.

    Note:

    An Internal Revenue Service Number (IRSN) is not a valid TIN for credit allowance.

  3. Certain credits (e.g., Child Tax Credit and Earned Income Credit) must meet age criteria for credit allowance.

    1. On January 1, 2001 IRS established a date of birth/death database. The database consists of the taxpayer's date of birth and date of death information as shown on Social Security Administration (SSA) records.

    2. Use Command Code (CC) DTVUE to research IRS and SSA date of birth and date of death information.

    3. If a taxpayer contacts IRS as a result of a math error notice, inform the taxpayer their return does not agree with SSA records. They should contact their local SSA office.

    4. To substantiate date of birth for tax purposes, taxpayer must provide documentation (e.g., birth certificate, school records, baptism records, etc.) for verification.

    5. When the taxpayer provides the appropriate documentation, use CC DM1DT to add, change, or delete data to correct the date of birth. See IRM 2.3.25, Command Codes DM1DT and DTVUE, for CC input.

  4. On 8/18/03, the Internal Revenue Service issued Rev. Rul. 200372, which applies a uniform method of determining when a child attains a specific age for certain tax purposes. For ALL tax years, taxpayer inquiries or claims regarding this issue are to be addressed utilizing the following information:

    • A child attains a given age on the anniversary of the date that the child was born. For example, a child born on January 1, 2003, attains the age of 1 on January 1, 2004.

    • The revenue ruling applies to age determination for children under IRC Sections 21 regarding dependent care benefits, Section 23 for adoption credits, Section 24 for child tax credits, Section 32 for earned income credits, Section 129 for dependent care assistance programs, Section 131 for foster care payments, Section 137 for adoption assistance programs, and Section 151 for dependency exemptions.

  5. If one of the following credits is being claimed for a TIN for which our records indicate a date of death prior to the tax year, correspond before using math error procedures. The credits to which this apply are Dependent care benefits, the Child Tax Credit, the Earned Income Credit and the Education Credits. In this instance, the Service should take steps to ensure that taxpayers are given notice of the problem and an opportunity to explain. The correspondence should indicate that the TIN at issue is incorrect since SSA records indicate the TIN being used is for a person who was deceased prior to the tax year.

    1. If documentation is received indicating the math error is incorrect, use CC DM1DT to change or delete the DOD. See IRM 2.3.25, Command Codes DM1DT and DTVUE for additional information.

    2. If appropriate documentation is not received, disallow the credit(s) and send Letter 105C using the following (indicate the specific credits, including exemptions if applicable, in an open paragraph):
      "We are disallowing your claim for the credits below because you omitted a correct social security number. The information provided by the Social Security Administration (SSA) indicates the number provided belongs to an individual who was deceased prior to the beginning of the tax year for which it is being used."

    Note:

    See IRM 21.6.1.5.1, Determining the Exemption Deduction Procedure, for information regarding exemption allowances.


21.6.3.4.1  (10-01-2007)
Non-Refundable Credits Procedures

  1. For taxable years 1998 through 2007, the non-refundable credits are applied in the order that they appear in this section:

    • Form 1116, Foreign Tax Credit (Individual, Estate or Trust)

    • Form 2441, Child and Dependent Care Credit

    • Schedule R, Credit for the Elderly or Permanently & Totally Disabled

    • Form 8863, Education Credits (Hope and Lifetime Learning Credits)

    • Form 8880, Credit for Qualified Retirement Savings Contributions

    • Rate Reduction Credit

    • Form 5695, Residential Energy Credit Carryforward

    • Child Tax Credit

    • Form 8880, Retirement Savings Contribution Credit

    • Form 8396, Mortgage Interest Credit

    • Form 8859, District of Columbia First-Time Homebuyer Credit

    • Form 8839, Qualified Adoption Expenses

    • Form 8834, Qualified Electric Vehicle Credit

    • Form 3468, Investment Credit

    • Form 5884, Work Opportunity Credit

    • Form 8861, Welfare-to-Work Credit

    • Form 6478, Credit for Alcohol Used as a Fuel

    • Form 6765, Part III, Credit for Increasing Research Activities

    • Form 8586, Low-Income Housing Credit

    • Form 8830, Enhanced Oil Recovery Credit

    • Form 8826, Disabled Access Credit

    • Form 8835, Renewable Electricity, Refined Coal, and Indian Coal Production Credit

    • Form 8845, Indian Employment Credit

    • Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

    • Form 8820, Orphan Drug Credit, line 10

    • Form 8874, New Markets Credit

    • Form 8881, Credit for Small Employers Pension Plan Startup Costs

    • Form 8882, Credit for Employer - Provided Childcare Facilities and Services

    • Form 8900, Qualified Railroad Track Maintenance Credit

    • Form 8864, Biodiesel and Renewable Diesel Fuels Credit

    • Form 8896, Low Sulfur Diesel Fuel Production Credit

    • Form 8906, Distilled Spirits Credit

    • Form 8907, Nonconventional Source Fuel Credit

    • Form 8908, Energy Efficient Home Credit

    • Form 8910, Alternative Motor Vehicle Credit

    • Form 8911, Alternative Fuel Vehicle Refueling Property Credit

    • Form 8847, Credit for Contributions to Selected Community Development Corporations

    • Trans-Alaska Pipeline Liability Fund Credit

    • Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma

    • Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts

    • Form 8844, Empowerment Zone and Renewal Community Employment Credit

    • Form 8860, Qualified Zone Academy Bond Credit

    • Form 8912, Credit for Clean Renewable Energy and Gulf Tax Credit Bonds


  2. These non-refundable credits are:

    1. Subtracted from the tax amount.

    2. Limited to the amount of the tax liability.

    3. Used before refundable credits.

    Reminder:

    Non-refundable credits MUST BE APPLIED in the order they appear in this section.

    Exception:

    If the Child Tax Credit is claimed in addition to the Mortgage Interest Credit, Adoption Credit or the D.C. First-Time Homebuyer Credit, Publication 972, Child Tax Credit, must be used to compute the correct amount of Child Tax Credit and to determine if it will be used before the other credits to reduce tax.

    Exception:

    If the Residential Energy Credit is claimed in addition to:

    • the Child Tax Credit and/or

    • the Mortgage Interest Credit, Adoption Credit, or the D.C. First - Time Homebuyer Credit

      these credits must be computed before completing Part II of the Form 5695, Residential Energy Credit Carryfoward.


  3. Credits may be subject to limitation for taxpayers subject to the Alternative Minimum Tax, see Form 6251, Alternative Minimum Tax - Individuals.

  4. For taxable years 2000 through 2006, all the nonrefundable personal credits (i.e., Child and Dependent Care Credit, Credit for the Elderly, Education Credits, Credit for Qualified Retirement Savings Contributions, Rate Reduction Credit, Child Tax Credit, Mortgage Interest Credit, Adoption Credit and the D.C. Homebuyer's Credit) are allowed to the extent of the full amount of the individual's regular tax and alternative minimum tax.

  5. Some credits may be eligible for carryback or carryover; refer to the individual form or schedule. (See IRM 21.5.9, Carrybacks.)

21.6.3.4.1.1  (10-01-2006)
Non-Refundable Credit Inquiries and Procedures

  1. Use the following procedures for non-refundable credit inquiries from taxpayer.

    Note:

    When non-refundable credits requiring TIN validation are being claimed, see IRM 21.6.1.6, Command Code DUPED and DDBCK, for appropriate use of CC DUPED and DDBCK for updating the Duplicate TIN database.

  2. When a taxpayer inquires by telephone:

    1. Request disclosure information from taxpayer to ensure you have the correct person.

    2. Accept oral statement for account action after disclosure information is verified. (See IRM 21.1.3, Operational Guidelines Overview.)

    3. Consider all related information and/or examine all documents before making adjustments or answering taxpayer inquiries.

    4. In the REMARKS section of an on-line adjustment, with or without a source document, enter complete disclosure information. (See IRM 21.5.2.4.6, Remarks Field.)

    5. If the adjustment is input on-line but a Form 4442, Inquiry Referral, is not required, no source document is sent to files.

    6. If the adjustment will not be input on-line or by COB, complete Form 4442, Inquiry Referral.

  3. Follow this table for all taxpayer inquiries regarding non-refundable credits. Refer to subsections in this section for specific credit information and procedures.

    If the taxpayer And Then
    Claimed the credit on the original return Provides a copy of the appropriate form or substantiating information Follow the specific subsection in this section and adjust the account.
    Claimed the credit on the original return DOES NOT provide missing information Follow IRM 21.5.4, General Math Error Procedures.
    Credit WAS NOT claimed on the original return   1. Advise taxpayer to file an amended return.
    2. Send Form 1040X, Amended U.S. Individual Income Tax Return, and the appropriate form(s) to taxpayer via an IDRS letter. If taxpayer is on the phone and the form is ordered through CIDS, the IDRS letter is not necessary if the taxpayer is informed of the mailing.

  4. If written documentation is required, advise taxpayer to send it to the site receiving the contact.

    Reminder:

    A fax is acceptable unless taxpayer's original signature is required. See IRM 21.5.3.4.4, Signature Requirements for Claims.

21.6.3.4.1.2  (10-12-2006)
Adjusting Non-Refundable Credit Accounts

  1. Math verify the form or schedule, if one is required.

  2. If the form, schedule, or documentation is incomplete and cannot be perfected with available information, follow claim processing in IRM 21.5.3.4.3, General Claims Procedures.

  3. If the credit requires a qualifying child use CC INOLES to verify the name control, Taxpayer Identification number, and date of birth of the qualifying child when applicable.

  4. Estimated tax penalty is not changed when applying a non-refundable credit.

    Exception:

    If the credit is claimed on a superseding return, estimated tax penalty is recomputed. (See IRM 20.1, Penalty Handbook)

  5. Adjust the tax account with TC 29X, RC 036, (RC 035 for Education credits), and the appropriate SC and blocking series.

21.6.3.4.1.3  (10-01-2007)
Form 2441 Child and Dependent Care Credit

  1. Effective TY 2003, the maximum amount of eligible employment-related expenses increase to $3,000 (to $6,000 if there are two or more qualifying individuals), the maximum credit rate increase to 35% and the AGI threshold at which the credit rate starts to reduce increase to $15,000. The amount deemed earned income of non-working spouse, who is a student or is physically or mentally unable to care for him/herself, increase to $250 a month if there is one qualifying person ($500 a month if there are two or more qualifying persons).

  2. Effective TY 2006, Notice 200542 allows a taxpayer to carry over unused dependent care benefits to be used in a grace period in the following year (Form 2441, line 13).

  3. To qualify for the credit, taxpayer must:

    1. Pay for the care of one or more qualifying persons.

    2. Have the same principal place of abode as the qualifying person.

      Note:

      For TY 2004 and prior, the taxpayer was required to maintain a home for the qualifying person(s).

    3. Have earned income for the year; both spouses, if married. See IRM 21.6.3.4.1.3(8)(b), if the spouse is a student or physically or mentally unable to care for him/herself.

    4. Claim expenses which allow taxpayer to work or seek employment.

    5. Pay someone who cannot be claimed as a dependent and is not the taxpayer's child under age 19.

    6. File a joint return, if married.

    7. If divorced or separated, have custody of the qualifying person(s)

    8. Identify the care provider.

    9. Exclude no more than $3,000 ($6,000 if more than one qualifying person) of dependent care assistance benefits. For TY 2002 and prior, the limit is $2,400 ($4,800 if more than one qualifying person).

    10. Submit a completed Form 2441, Child and Dependent Care Credit.

    Note:

    An individual shall not be treated as having the same principal place of abode of the taxpayer if at any time during the taxable year, the relationship between the individual and the taxpayer is in violation of local law.


    Note:

    See Publication 17, Your Federal Income Tax For Individuals, and/or Publication 503, Child and Dependent Care Expenses, for detailed information on all of the points listed above.


  4. If an employer provides dependent care benefits under a qualified plan, a taxpayer may be able to exclude the benefits from income. Box 10 of Form W-2, Wage and Tax Statement, shows the total amount of dependent care benefits provided during the year under a qualified plan. Taxpayers will complete Part III of Form 2441 or Schedule 2 (Form 1040A) to claim the exclusion.

    Note:

    For taxable years beginning after December 31, 2002, dependent care assistance provided by the Defense Department (under a dependent care assistance program in effect on the date of enactment) for members of the uniformed services is excludable from gross income as a qualified military benefit subject to the present-law rules.

  5. Taxpayer must furnish a valid Taxpayer Identification Number (TIN) for every qualifying person. This number may be:

    • A Social Security Number (SSN) issued by the Social Security Administration

    • An Individual Taxpayer Identification Number (ITIN) issued by the IRS if taxpayer is not eligible for an SSN.

    • An Adoption Taxpayer Identification Number (ATIN) issued by the IRS for a child while an adoption is pending

    Note:

    For taxpayers indicating a religious (e.g., Amish/Mennonite) or conscience-based objection to obtaining a TIN, refer to IRM 21.6.1.4.10.1, Determining the Exemption Deduction Procedure.

    Note:

    See IRM 21.6.3.4, Credits Procedures, for more information regarding correct TINs.

  6. A qualifying person is taxpayer's:

    1. Dependent qualifying child under the age of 13.

    2. Spouse, if physically or mentally unable to care for him/herself.

    3. Dependent, if physically or mentally unable to care for him/herself.

    Note:

    For TY 2005 and subsequent, a qualifying person must have the same principal place of abode as the taxpayer for more than one-half of such taxable year.

  7. For TY 2004 and prior, the taxpayer (and spouse, if married) must have maintained a home for the qualifying person. Maintaining a home requires the taxpayer to:

    1. Live in the home with the qualifying person(s).

    2. Pay more than half the cost of running the home for the tax year.

  8. Earned income test:

    1. Taxpayer (and spouse, if married) must have earned income.

    2. A spouse is treated as having earned income for any month that he/she is a full-time student or, physically or mentally unable to care for him/herself.

    3. Certain income earned by clergy/religious workers may not be considered earned income for this purpose. (See Publication 503, Child and Dependent Care Expenses.)

  9. Expenses are work related when:

    1. They allow taxpayer(s) to work or look for work.

    2. They are for a qualifying person's care.

  10. The care provider must:

    1. Provide care for a qualifying person.

    2. Not be taxpayer's dependent.

    3. Not be taxpayer's child under age 19, even if not claimed as a dependent.

    4. Submit personal identification; name, address, and valid TIN. A valid TIN includes an SSN, ITIN or Employer Identification Number (EIN).

    Exception:

    The provider's TIN is not required if the provider is an exempt organization or if the provider was a foreign citizen with no U.S. address and the child care was provided in a foreign country.

21.6.3.4.1.3.1  (10-01-2002)
Form 2441 Taxpayer Inquiry

  1. Taxpayer may inquire concerning the credit.

    If taxpayer And Then
    Claimed the credit on the original return The missing information is provided 1. Validate TIN if submitted for the qualifying person or care provider.
    2. Follow math error procedures.
    3. Adjust the account.
    Claimed the credit on the original return DOES NOT provide missing information Follow IRM 21.5.4, General Math Error Procedures.
    Claims "due diligence" was used to secure the provider's TIN The provider's TIN still cannot be secured Follow the guidelines in Publication 17, Your Federal Income Tax (For Individuals), under Form 2441, for Provider Identification Test.
    Credit WAS NOT claimed on the original return   1. Advise taxpayer to file an amended return.
    2. Send Form 1040X, Amended U.S. Individual Income tax Return, and Form 2441 to taxpayer.

21.6.3.4.1.3.2  (02-26-2007)
Form 2441 Adjusting the Account

  1. If the form is incomplete and cannot be perfected with available information, follow claim processing in IRM 21.5.3, General Claims Procedures.

  2. Math verify the Form 2441, Child and Dependent Care Credit.

    1. Expenses are limited to $3,000 for one dependent and $6,000 for more than one dependent (TY 2002 and prior, $2,400 for one dependent and $4,800 for more than one dependent).

    2. The care expenses may not exceed taxpayer's earned income; if married, the earned income of the spouse earning the lesser amount.

    3. Figure the excludable amount of employer-provided dependent care benefits on Form 2441, Part III.

    4. The amount of the credit is determined by multiplying work-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on the AGI. The following table shows the percentage to use for TY 2003 and subsequent based on AGI.

    If the AGI is between ... Then the percentage is...
    $1 and $15,000 35%
    $15,001 and $17,000 34%
    $17,001 and $19,000 33%
    $19,001 and $21,000 32%
    $21,001 and $23,000 31%
    $23,001 and $25,000 30%
    $25,001 and $27,000 29%
    $27,001 and $29,000 28%
    $29,001 and $31,000 27%
    $31,001 and $33,000 26%
    $33,001 and $35,000 25%
    $35,001 and $37,000 24%
    $37,001 and $39,000 23%
    $39,001 and 41,000 22%
    $41,001 and $43,000 21%
    $43,000 and up 20%

21.6.3.4.1.4  (10-01-2002)
Schedule R Credit for the Elderly or Permanently and Totally Disabled

  1. To qualify for the credit, taxpayer must be:

    1. U.S. citizen or resident alien.

    2. Within certain income limits.

    3. Age 65 or older by the end of the tax year or under age 65 at the end of the tax year, retired on permanent and total disability, not mandatory retirement age, and received taxable disability income.

      Note:

      Taxpayer is considered age 65 on the day before the 65th birthday.

  2. Schedule R (Form 1040) or Schedule 3 (Form 1040A) must be submitted.

    1. Filing status/age must be checked.

    2. A physician's statement must certify the disability condition or the box must be checked to indicate the statement was filed or obtained in a previous year.

    3. On a joint return, if both spouses are disabled, both must submit a statement.

    4. The taxpayer may request the IRS to compute the credit.

    Note:

    See Publication 17, Your Federal Income Tax (For Individuals), Publication 524, Credit for the Elderly or the Disabled, or Publication 554, Older Americans' Tax Guide, for detailed information.

21.6.3.4.1.5  (10-01-2007)
Form 8863 Education Credits

  1. Taxpayer may claim an education credit for qualified tuition and related expenses paid to an eligible educational institution, including accredited colleges, universities, and vocational schools.

  2. Qualified tuition and expenses means the tuition and fees an individual must pay to be enrolled at or attend the institution. It does not include:

    • Charges for room, board, insurance, transportation, and similar personal living or family expenses

    • Charges for any course involving sports, games, or hobbies unless part of the student's degree program or in the case of the Lifetime Learning Credit to acquire or improve job skills.

    • Amounts paid with a tax-free scholarship or tax-free employer- provided education assistance

  3. A taxpayer can elect, for any year, only one of the credits for each student.

  4. A taxpayer whose filing status is married filing separately cannot claim the credits.

  5. For TY 2005 or TY 2006, the Gulf Opportunity Zone Act of 2005 temporarily expanded the Hope and Lifetime learning credits for students attending (i.e. enrolled and paying tuition at) an eligible education institution located in the Gulf Opportunity Zone.

    • For taxpayers or their dependents who attended an educational institution located in the Gulf Opportunity Zone, the Hope credit was increased to 100 percent of the first $2200 ($2000 for TY 2005) in qualified tuition and related expenses and 50 percent of the next $2200 ($2000 for TY 2005) of qualified tuition and related expenses for a maximum credit of $3300 ($3000 for TY 2005) per student.

    • For taxpayers or their dependents who attend an educational institution located in the Gulf Opportunity Zone, the Lifetime Learning credit rate was increased from 20 percent to 40 percent.

    The act also expanded the definition of qualified expenses to mean qualified higher education expenses as defined under the rules relating to qualified tuition programs, including certain room and board expenses for at least half-time students.

  6. For TY 2002 and subsequent years, a credit can be claimed in the same year you take a tax-free distribution from a Coverdell ESA (Education Savings Account), formerly known as Education IRAs, as long as the same expenses are not used for both benefits.

  7. The credit may be for expenses of taxpayer, taxpayer's spouse, or taxpayer's eligible dependent claimed on taxpayer's return.

    1. If a parent takes a dependency exemption deduction for a student on his or her return, only the parent can claim the education tax credit. In that case, the student may not claim the education credit.

    2. If the parent is eligible to claim the dependency exemption deduction for a student, and does not take the deduction, only the student may claim the education tax credit. In that case the parent may not claim the education credit, even if the parent paid the qualified expenses.

  8. Allow the credit if the student states they are not claimed as a dependent on their parent's or someone else's return.

    Note:

    For taxpayers indicating a religious (e.g., Amish/Mennonite) or conscience-based objection to obtaining a TIN, refer to IRM 21.6.1.4.10.1, Determining the Exemption Deduction Procedure.

  9. The credit is reduced for taxpayers with modified adjusted gross income (MAGI) between certain income ranges until it is completely eliminated.

    • TY 2007 - The range is $47,000 to $57,000 ($94,000 to $114,000 for married filing joint taxpayers).

    • TY 2006 - The range is $45,000 to $55,000 ($90,000 to $110,000 for married filing joint taxpayers).

    • TY 2005 - The range is $43,000 to $53,000 ($87,000 to $107,000 for married filing joint taxpayers).

    • TY 2004 - The range is $42,000 to $52,000 ($85,000 to $105,000 for married filing joint taxpayers).

    • TY 2003 - The range is $41,000 to $51,000 ($83,000 to $103,000 for married filing joint taxpayers).

    Note:

    See Publication 970, Tax Benefits for Education, for more information.

  10. Input the adjustment using RC 035.

  11. Form 8863, Education Credits (Hope and Lifetime Learning Credits), must be submitted.

21.6.3.4.1.5.1  (10-01-2006)
HOPE Scholarship Credit

  1. The HOPE scholarship credit:

    1. Applies to expenses paid on or after January 1, 1998, for academic periods beginning on or after that date.

    2. For TY 2006 is 100% of the first $1,100 and 50% of the next $1,100 of out-of-pocket expenses for each eligible student. For TY 2005 and prior was 100% of the first $1,000 and 50% of the next $1,000 of out-of-pocket expenses for each eligible student.

    3. Requires that the student be enrolled at least half-time in one of the first two years of post-secondary education.

    4. Can be claimed for only two tax years per student.

21.6.3.4.1.5.2  (10-01-2003)
Lifetime Learning Credit

  1. The lifetime learning credit:

    1. Applies to expenses paid on or after July 1, 1998, for academic periods beginning on or after that date.

    2. Is 20% of the first $10,000 ($5,000 for TY 2002 and prior) of out-of-pocket expenses for all eligible students in the family.

    3. There is no course-load requirement, the credit is available for education beyond the first two years of post-secondary education (including graduate studies), and may be claimed for an unlimited number of years.

21.6.3.4.1.6  (10-01-2002)
Form 1116 Foreign Tax Credit

  1. To qualify for the credit, taxpayer must have paid or accrued income tax in a foreign country or U.S. possession.

  2. Taxpayer may claim the credit against U.S. income tax or deduct the foreign tax as an itemized deduction.

  3. If the change in the credit is the result of a refund of foreign taxes paid, manually compute and assess interest per IRM 20.2, Interest. Contact taxpayer to determine the refund date, if necessary.

    Reminder:

    If the refund of foreign taxes included no interest, restriction of the account can be avoided by using TC 298; enter the refund date in the interest computation field of the adjustment.

  4. Form 1116, Foreign Tax Credit, must be submitted unless all of the taxpayer's foreign source income is passive and total creditable foreign taxes are not more than $300 ($600 if married filing a joint return).

    Note:

    See Form 1116, Foreign Tax Credit, Publication 17, Your Federal Income Tax (For Individuals), and Publication 514, Foreign Tax Credit for Individuals, for detailed information.

21.6.3.4.1.7  (10-01-2007)
Form 8907 Non-Conventional Source Fuel Credit

  1. To qualify for the credit, taxpayer must be engaged in the domestic production and sale of liquid, gaseous or solid synthetic fuels produced from coal or of gas produced from biomass, per IRC Section 45K.

  2. For TY 2006 and subsequent, the credit is claimed as a general business credit on Form 3800, General Business Credit.

  3. For TY 2005 the credit is figured on Form 8907.

  4. For TY 2004 and prior, the taxpayer must include a credit computation with the claim; a specific form/schedule is not required.

  5. In addition to TC 29X to adjust the credit, input item reference number 883 to record the credit.

21.6.3.4.1.8  (10-01-2007)
Form 8834 Qualified Electric Vehicle Credit

  1. To qualify for the credit, taxpayer must have placed a qualified electric vehicle into service during the tax year.

  2. The full amount of the credit is available for a qualified electric vehicle placed in service before January 1, 2006. For vehicles placed in service in 2006, the credit will be 25% of the otherwise allowable amount as under current law. The credit will be unavailable for vehicles placed in service after December 31, 2006.

  3. Form 8834, Qualified Electric Vehicle Credit, must be submitted. (The credit needs to be carried to Form 3800, General Business Credit, for purposes of figuring the allowable general business credit.)

    Note:

    See Form 8834, Qualified Electric Vehicle Credit, or Publication 17, Your Federal Income Tax (For Individuals), for detailed information.

21.6.3.4.1.9  (10-01-2007)
Form 3468 Investment Credit

  1. The investment credit consists of the rehabilitation credit, energy credit, qualifying advanced coal project credit, and qualifying gasification project credit.

  2. For TY 2005 and prior, the Form 3468 must be submitted. Form 3800, General Business Credit, must be filed if two or more credits are claimed.

    Note:

    See Form 3468, Investment Credit, for detailed information.

21.6.3.4.1.10  (01-12-2007)
Form 5884 Work Opportunity Credit

  1. To qualify for the credit, the taxpayer must have paid or incurred wages for employees who are certified as members of a targeted group and who began work after September 30, 1996 and before January 1, 2008.

    Exception:

    The Katrina Emergency Tax Relief Act of 2005 expanded the Work opportunity Credit to allow taxpayers who hire certain Hurricane Katrina employees to claim the credit even if the employees were not hired before January 1, 2006. These employees are not required to be certified by the state employment security agency.

  2. For TY 2006 and subsequent, the credit must be claimed as a general business credit on Form 3800, General Business Credit.

  3. For TY 2005 and prior, Form 5884, Work Opportunity Credit, must be submitted. (The credit must be carried to Form 3800 if two or more credits are claimed.)

    Note:

    See Form 5884, Work Opportunity Credit, and its instructions for detailed information.

21.6.3.4.1.10.1  (01-11-2006)
Form 5884-A - Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma

  1. The Gulf Opportunity Zone Act of 2005 provides for an Employee Retention Credit and a Hurricane Katrina Housing Credit to qualified employers.

    • The Employee Retention Credit provides a credit of 40 percent of the qualified wages (up to a maximum of $6000 in qualified wages per employee) paid by an employer to an eligible employee.

    • The Hurricane Katrina Housing Credit provides temporary income exclusion for the value of in-kind lodging provided for a month to a qualified employee (and the employees spouse or dependents) by or on behalf of a qualified employer. The amount of exclusion for any month for which lodging is furnished cannot exceed $600. The credit is equal to 30 percent of the value of lodging excluded from the income of a qualified employee.

  2. Both credits are reported on Form 3800. See Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma, and its instructions for more detailed information.

21.6.3.4.1.10.2  (10-01-2002)
Form 8884 New York Liberty Zone Business Employee Credit

  1. The Job Creation and Worker Assistance Act of 2002 created a new targeted group for the Work Opportunity Tax Credit (WOTC). See IRM 21.7.4.4.8.3.2.1, Expanded Work Opportunity Credit, New York Liberty Zone, Form 8884, for detailed information.

  2. This credit was only available for work performed during calendar year 2002 or 2003.

21.6.3.4.1.11  (10-01-2007)
Form 6478 Credit for Alcohol Used as Fuel

  1. Form 6478, Credit for Alcohol Used as Fuel, is used to claim the credit for alcohol used, or sold for use, as fuel in a trade or business. See IRM 21.7.4.4.8.3.3, Credit for Alcohol Used as Fuel, Form 6478, for more information. The credit consists of:

    • Alcohol Mixture Credit

    • Alcohol Credit

    • Small Ethanol Producer Credit

  2. The credits are effective for fuels sold or used after December 31, 2004. For prior year credits, see previous versions of the Form 6478 and instructions.

  3. Only one credit may be taken with respect to any gallon of alcohol. If an amount is or will be claimed for alcohol in a mixture on Form 720 or Form 8849, it can not be claimed on Form 6478.

  4. Taxpayers must take the alcohol mixture credit against their Form 720 fuel tax liability and can use the Form 6478, to the extent that the liability is exceed.

  5. Form 6478, Credit for Alcohol Used as Fuel, must be submitted. (For TY 2004 and prior the credit must be carried to Form 3800 if two or more credits are claimed.)

    Note:

    See Form 6478, Credit for Alcohol Used as Fuel, and its instructions for detailed information.

  6. In addition to TC 29X to adjust the credit, input item reference number 884 to record the credit.

21.6.3.4.1.12  (10-01-2007)
Form 6765 Credit for Increasing Research Activities

  1. To qualify for the credit, taxpayer must have qualified research expenses paid or incurred in carrying on an active trade or business. The credit applies to qualified amounts paid or incurred before January 1, 2008.

  2. For TY 2006 and subsequent the credit must be claimed as a general business credit on Form 3800, General Business Credit.

  3. For TY 2005 and prior, Form 3800, must be filed if two or more credits are claimed.

  4. Unless a taxpayer's only source of credit is from a pass-through entity, Form 6765, Credit for Increasing Research Activities, must be submitted.

  5. For taxable years including a research credit suspension period, a portion of the research credit may be suspended. See IRM 21.7.4.4.8.3.4.1, Research Credit Suspension Periods, for information and procedures involving the suspension periods.

    • The first research suspension period is July 1, 1999 through September 30, 2000.

    • The second suspension period is October 1, 2000 through September 30, 2001.

    Note:

    See Form 6765, Credit for Increasing Research Activities, for detailed information.

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