Knowing available tax credits can help reduce tax liability
UTILIZING tax credits is an effective way to reduce your tax liability. Most individuals know about common credits such as the child tax credit and earned income credit.
The following are credits that are often overlooked:
» Alternative minimum tax
Each year millions of taxpayers are subject to AMT. Many of these taxpayers are unaware they can benefit from a minimum tax credit in future years.
When a taxpayer pays AMT, a nonrefundable minimum tax credit or AMT credit is generated. This credit is applied to regular tax liability (less nonrefundable credits) in future years, but only to the extent that regular tax liability exceeds AMT liability. The AMT credit never expires; therefore, it can be carried forward indefinitely.
Individual taxpayers may also be eligible to claim the AMT refundable credit for tax years before 2013. Subject to certain limitations, taxpayers who have a long-term, unused minimum tax credit may receive a refund for the portion of the AMT refundable credit that exceeds tax liability.
» Non-business energy property
The non-business energy-property credit is a nonrefundable tax credit for individuals who install certain energy-efficient property in their personal residences after Dec. 31, 2005 and before Jan. 1, 2008. The residence must be in the United States and owned by the taxpayer. Additional rules require that original use of the property begin with the taxpayer (the property must be new) and reasonably expected to be in use for at least five years.
The credit is equal to the sum of (subject to limitations):
» Ten percent of the amount paid or incurred by the taxpayer for qualified energy-efficiency improvements installed during the tax year, and
» The amount of residential energy property expenditures.
Qualified energy-efficiency components include:
» Insulation material designed to prevent heat loss or gain when installed;
» Exterior windows;
» Exterior doors; and
» Any metal roof designed to reduce heat gain.
Residential energy property expenditures include:
» Any advanced main air circulating fan;
» Any qualified natural gas, propane, or oil furnace or hot water boiler; and
» Other energy-efficient building property as defined by Section 25C(d) of the Internal Revenue Code.
» Hybrid motor vehicle
If you purchased a hybrid vehicle last year, you may be entitled to a tax credit on your 2006 return. Taxpayers are allowed a nonrefundable tax credit for purchases of hybrid motor vehicles, including passenger automobiles and light-weight trucks (weighing less than 8,500 pounds) purchased before 2011.
To qualify as a hybrid motor vehicle, the vehicle must:
» Draw energy from an internal engine and a rechargeable battery
» Receive a certificate of conformity under the Clean Air Act and meet or exceed the equivalent qualifying California low-emission vehicle standard for that make and model year.
» Have a maximum available power (from battery) of at least 4 percent.
» Be purchased new.
» Be acquired for use or lease by the taxpayer.
» Have been made by a manufacturer.
» Be used within the United States.
The credit amount is a combination of a fuel efficiency and energy conservation component. The maximum credit available in 2006 is $3,400 for those who purchase the most fuel-efficient vehicles.
To find out whether your car qualifies for the hybrid tax credit, you can go to the IRS.gov Web site and search for "qualified hybrid vehicles."
Nicole Wyngaard is a tax manager for the Honolulu office of Grant Thornton LLP. She can be reached at Nicole.Wyngaard@gt.com