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A tax credit is a
tax incentive A tax incentive is an aspect of a country's tax code Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules a ...
which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the
state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, Un ...
. It may also be a credit granted in recognition of taxes already paid or a form of state "discount" applied in certain cases. Another way to think of a tax credit is as a rebate.


Refundable vs non Refundable

A refundable tax credit is one which, if the credit exceeds the taxes due, the government pays back to the taxpayer the difference. In other words, it makes possible a negative tax liability. 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 the taxpayer that $200. 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 end 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

Many systems refer to taxes paid indirectly, such as taxes withheld by payers of income, as credits rather than prepayments. In such cases, the tax credit is invariably refundable. The most common forms of such amounts are
payroll withholding Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, or a ''Prélèvement à la source'', is income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by th ...
of income tax or
PAYE A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax An income tax is a tax imposed on individuals or entitie ...
, withholding of tax at source on payments to nonresidents, and input credits for
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
.


Individual income tax credits

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


Low income subsidies

Several income tax systems provide income subsidies to 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

In the United Kingdom, the Child Tax Credit and
Working Tax Credit Working Tax Credit (WTC) is a welfare, state benefit in the United Kingdom made to people who work and have a low income. It was introduced in April 2003 and is a means-tested benefit. Despite their name, tax credits are not to be confused with Tax ...
were paid directly into the claimant's bank account or Post Office Card Account. In exceptional circumstances, these can be paid by cashcheque (sometimes called
giro A giro transfer, often shortened to giro (), is a payment transfer from one bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a cus ...
), However; payments may stop if account details are not provided. A minimum level of Child Tax Credits is payable to all individuals or couples with children, up to 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 Disability Living Allowance (DLA) is a social security Welfare is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with we ...
and the education status of any children over sixteen years of age. Since 2018, Child Tax Credit has been replaced by
Universal Credit Universal Credit is a United Kingdom Welfare state in the United Kingdom, social security payment. It is replacing and combining six benefits for working-age people who have a low household income: income-based Employment and Support Allowance, in ...

Universal Credit
for most people.
Working Tax Credit Working Tax Credit (WTC) is a welfare, state benefit in the United Kingdom made to people who work and have a low income. It was introduced in April 2003 and is a means-tested benefit. Despite their name, tax credits are not to be confused with Tax ...
is paid to single low earners with or without children who are aged 25 or over and are working over 30 hours per week and also to 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. It is being replaced by
Universal Credit Universal Credit is a United Kingdom Welfare state in the United Kingdom, social security payment. It is replacing and combining six benefits for working-age people who have a low household income: income-based Employment and Support Allowance, in ...

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 like food and fuel. According to Gavin Kelly of the
Resolution Foundation The Resolution Foundation is an independent British think tank A think tank, or policy institute, is a research institute A research institute, research centre, or research center is an establishment founded for doing research. Research insti ...
, tax credits help raise
living standard Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
s of low paid workers. He wrote in the ''
New Statesman The ''New Statesman'' is a British political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations betwe ...
'', "Perhaps the biggest misconception is the voguish notion that if tax credits are cut, employers will somehow decide to offer pay rises to fill the gap. This is saloon-bar economics espoused by some on both left and right." On 15 September 2015, the House of Commons voted
BBC The British Broadcasting Corporation (BBC) is a public service broadcaster, headquartered at Broadcasting House in Westminster, London. It is the world's oldest national broadcaster, and the largest broadcasting, broadcaster in the world by ...

BBC
(London) 15 September 201
Commons back Osborne plan for tax credit cuts
/ref> to decrease Tax Credit thresholds, a law that came into effect on 6 April 2016. Opponents claimed that it would harm those on low incomes. Simon Hopkins, Chief Executive of charity
Turn2us Turn2us is a trading name A trade name, trading name, or business name is a pseudonym A pseudonym () or alias () (originally: ψευδώνυμος in Greek) is a fictitious name that a person or group assumes for a particular purpose, which d ...
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 get poorer. Tax credits are a vital source of income for those on a low wage and for many they make up a substantial portion of their monthly income. The IFS supported the opposition view that the effects of the changes would disproportionately reduce the income of poor families, even taking into account reductions in income tax and an increase in the
National Living WageThe National Living Wage is an obligatory minimum wage A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most List of minimum wages by country ...
. The government responded that the tax credit system had, for too long, been used to subsidise low pay and the changes would bring total expenditure on tax credits back down to more sustainable levels seen in 2007–08. On 26 October 2015 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.''
The Independent ''The Independent'' is a British online newspaper An online newspaper (or electronic news or electronic news publication) is the electronic publishing, online version of a newspaper, either as a stand-alone publication or as the online ver ...
'' (London) 27 October 201
"Tax credits: House of Lords votes to delay cuts by three years"
/ref>


United States

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 2016, 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 $1,125. *Retirement savings contribution credit: a nonrefundable credit of up to 50% for up to $2000 of contributions to qualified retirement savings plans, such as
IRAs The Infrared Astronomical Satellite or in Dutch Dutch commonly refers to: * Something of, from, or related to the Netherlands * Dutch people () * Dutch language () *Dutch language , spoken in Belgium (also referred as ''flemish'') Dutch may a ...
(including the
RothRoth may refer to: Places * Roth (district) Roth is a ''Landkreis'' (district) in Middle Franconia, Bavaria Bavaria (; German language, German and Bavarian language, Bavarian: ''Bayern'' ), officially the Free State of Bavaria (German and Bav ...
, SEP and
IRA Ira or IRA may refer to: *Ira (name), a Hebrew, Sanskrit, Russian or Finnish language personal name *Ira (surname), a rare Estonian and some other language family name Law *Individual retirement account, in the US, giving tax benefits *Indian Reor ...
),
401(k) In the United States, a 401(k) plan is an employer-sponsored defined contribution, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Employee funding comes directly off their paycheck and may be matched ...
/
403(b) In the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washing ...
/ 457 plans and the
Thrift Savings Plan TSP logo The Thrift Savings Plan (TSP) is a defined contribution plan for United States civil service employees and retirees as well as for members of the Uniformed services of the United States, uniformed services. As of December 31, 2020, TSP has ...
; phased out starting (for the 2014 tax year) at incomes above $18,000 for single returns, $27,000 for heads of household, and $36,000 for joint returns. *Mortgage interest credit: a nonrefundable credit that may be limited to $2,000, granted under specific mortgage programs. *
Premium tax credit The premium tax credit (PTC) is a refundable tax credit A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state (polity), state. It may also be a cred ...
: this refundable credit is provided to individuals and families who obtain healthcare insurance policies through a
healthcare exchange In the United States, health insurance marketplaces, also called health exchanges, are organizations in each state through which people can purchase Health insurance in the United States, health insurance. People can purchase health insurance that ...
, and whose income falls between 100% and 400% of the applicable federal poverty line. It was first introduced in the 2014 tax year.


Family relief

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 a
tax deduction Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of ...

tax deduction
for each dependent child): * Child credit: Parents of children who are under age 17 at the end of the tax year may qualify for a credit up to $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. * Child and dependent care credit: If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim a credit up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit. *Credit for adoption expenses: a credit up to $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 his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.Presti and Naegele Tax Newsletter
FAQ: What tax breaks come with raising a child?, February 2012.


Education, energy and other subsidies

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 CreditThe American Opportunity Tax Credit is a partially refundable tax credit first detailed in Section 1004 of the American Recovery and Reinvestment Act of 2009. The act specifies: # Provisions were originally specific to tax years 2009 and 2010, late ...
is 100% of the first $2,000 and 25% of the next $4000 of qualified tuition expenses per year for up to two years. The Lifetime Learning Credit 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 Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of ...

tax deduction
. *First time homebuyers credit up to $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.


Business tax credits

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


United States

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 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. *Alternative fuel credits: a credit based on the amount of production of certain non-petroleum fuels. *Disaster relief credits *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 the Federal research and employment credits, property tax credits, (often called abatements), granted by cities for building facilities within the city, etc. These items often are negotiated between a business and a governmental body, and specific to a particular business and property.


Federal nonrefundable investment tax credits

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

The legislative incentive program to encourage the preservation of “historical buildings”. Congress instituted a two-tier Tax Credit incentive under the 1986 Tax Reform Act. 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.


Renewable Energy/Investment Tax Credit (ITC)

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 Renewable energy is energy that is collected from renewable resource File:Global Vegetation.jpg, Global vegetation A renewable resource, also known as a flow resource, is a natural resource which will replenish to replace the portion resou ...
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. Though set to expire at the end of 2015, the ITC for residential solar installations was renewed in December 2015. The credit will continue at 30% through 2018, and will slowly decline to 10% in 2022. The ITC for other technologies (including geothermal) was extended by one year. Installations will be considered eligible for the ITC based on the date that construction starts.


= Renewable Energy/Production Tax Credit (PTC)

= Section 45 of the Internal Revenue Code allows an income tax credit of 2.3 cents/kilowatt-hour (as adjusted for inflation for 2013) 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), was created under the
Energy Policy Act of 1992 The Energy Policy Act, effective October 24, 1992, (102nd Congress H.R.776.ENR, abbreviated as EPACT92) is a United States government The federal government of the United States (U.S. federal government) is the national government of the U ...
(at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation). In late 2015 a large majority in
Congress Congresses are formal meetings of the representatives of different countries A country is a distinct territorial body or political entity A polity is an identifiable political entity—any group of people who have a collective identity, ...

Congress
voted to extend the PTC for
wind Wind is the natural movement of air or other gases relative to a planet's surface. Wind occurs on a range of scales, from thunderstorm A thunderstorm, also known as an electrical storm or a lightning storm, is a storm characterized by th ...

wind
and
solar power Solar power is the conversion of renewable energy Renewable energy is energy that is collected from renewable resource File:Global Vegetation.jpg, Global vegetation A renewable resource, also known as a flow resource, is a natural re ...
for 5 years and $25 billion. Analysts expect $35 billon of investment for each type.


= Low Income (Affordable) Housing Tax Credit (LIHTC)

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

= QSCBs are U.S. debt instruments used to 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

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. It can be used to offset income or payroll taxes, depending on the situation.


Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a federal tax credit providing incentives to employers for hiring groups facing high rates of unemployment, such as veterans, youths and others. WOTC helps these targeted groups obtain employment so they are able to gain the skills and experience necessary to obtain better future job opportunities. The WOTC is based on the number of hours an employee works and benefits the employer directly. In December 2014, the credit was extended retroactively to the beginning of 2014 by the Tax Increase Prevention Act of 2014 (TIPA), P.L. 113–295. That act authorized the credit only through December 31, 2014. Later, through the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), Congress modified and extended the WOTC through December 31, 2019.


American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) 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 $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 the theoretical maximum, and that even with tax credits, higher education remains tax-disadvantaged compared to other investments.


State tax credits

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 state. These credits can be either in the form 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, bank tax and income tax.


Oregon Residential Energy Tax Credit (RETC)

The state of Oregon's RETC is a tax credit for solar systems. In 2016, Oregon Governor Kate Brown released a new budget proposal that does not extend the RETC program. In 2015, RETC gave $12.2 million in tax credits; in 2014, that amount was approximately $4.2 million. Under the budget proposal, the credit will sunset at the end of 2017. Extension of the tax credit is a top priority for Oregon's solar industry.


Value added tax

Resellers or producers of goods or providers of services (collectively, providers) must collect
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law L ...
(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 other providers. Most VAT systems allow the amount of such VAT paid or considered paid to be used to offset VAT payments due, generally referred to as an input credit. Some systems allow the excess of input credits over VAT obligations to be refunded after a period of time.


Foreign tax credit

Income tax systems that impose tax on residents on their worldwide income tend to grant a
foreign tax credit A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same income (in the ...
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 Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case ...
. The credit is generally granted to individuals and entities, and is generally nonrefundable. See
Foreign tax credit A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same income (in the ...
for more comprehensive information on this complex subject.


Credits for alternative tax bases

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 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

*
Tax choice In public choice theory, tax choice (sometimes called taxpayer sovereignty, earmarking or Fiscal subsidiarity) is the belief that individual taxpayers should have direct control over how their taxes are spent. Its proponents apply the theory of co ...


References


External links


Work Opportunity Tax CreditDatabase of State Incentives for Renewables and Efficiency
- Department of Energy. Business Tax Incentives

- Child Poverty Action Group
Child Tax Credit
{{Authority control Tax terms