In this chapter you will find discussions of the child tax credit, dependent care credit, earned income credit (EIC), adoption credit, retirement savings credit, mortgage interest credit, credit for plug-in electric vehicles, the premium tax credit, the residential energy credits and the health coverage credit for displaced workers. Education tax credits are discussed in Chapter 33.

The child tax credit is $1,000 for each qualifying dependent child under age 17. To claim the credit, you must follow the steps on the “Child Tax Credit Worksheet.” There is a phaseout of the credit (25.3). If the credit exceeds your tax liability, you may be entitled to a refundable credit called the “additional tax child credit”.

Depending on your income, the child and dependent care credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. If your adjusted gross income exceeds $43,000, the maximum credit is $600 for one dependent and $1,200 for two or more dependents (25.5).

The earned income credit (EIC) is provided to low-income workers who support children, and a limited credit is allowed to certain workers without qualifying children (25.6).

An adoption credit of up to $13,570 may be claimed on your 2017 return for costs of adopting a child under the age of 18 or a disabled person incapable of self-care (25.8).

The premium tax credit applies to taxpayers with income within specified limts who obtain health coverage through a government Marketplace (also called exchange). Taxpayers who received an advance of the credit during 2017 to help pay their premiums must reconcile, on Form 8962, the advanced amount with the actual credit allowed for the year (25.12).

25.1 Overview of Personal Tax Credits

After you determine your regular tax liability using the tax table (22.2), Tax Computation Worksheet (22.3), or capital gain worksheets (22.4), and your AMT liability if any (23.1), you may be able to reduce that liability by one or more tax credits. Most tax credits are nonrefundable, meaning that they are limited by your tax liability. All nonrefundable personal credits, including the child tax credit, dependent care credit, education credits, saver’s credit and the adoption credit, may be claimed to the full extent of regular tax liability plus alternative minimum tax (AMT) liability.

The additional child tax credit, the net premium tax credit, the earned income credit, and in part, the American Opportunity credit, are refundable, meaning that if the credit exceeds your tax liability you will receive a refund for the excess.

Eligibility rules and credit limitations for many of the personal credits are discussed in this chapter, while some are discussed in other chapters as shown below. Business tax credits are in Chapter 40.

Child tax credit and additional child tax credit (25.2–25.3).

Child and dependent care credit (25.4–25.5).

Earned income credit (25.6–25.7).

Adoption credit (25.8–25.9).

Qualified retirement savings contributions credit (25.10–25.11).

Premium tax credit (25.12).

Health coverage credit (25.13).

Mortgage interest credit (25.14).

Residential energy tax credits (25.15).

Plug-in electric vehicle credit (25.16).

Repayment of the first-time homebuyer credit (25.17).

Education credits (American Opportunity and Lifetime Learning credits) (33.7–33.9).

Credit for elderly or disabled (34.7–34.9).

Foreign tax credit (36.13).

Prior-year AMT credit (23.4).

Credit for excess Social Security or Railroad Retirement withholdings (26.8).

Credit for tax on mutual fund undistributed capital gain (32.6).

25.2 Child Tax Credit for Children Under Age 17

You may be able to claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2017. To figure the exact amount of your credit on your 2017 return, you must complete the “Child Tax Credit Worksheet” in the IRS instructions to Form 1040 or 1040A. On the IRS worksheet, you determine if the potential credit ($1,000 × number of qualifying children) is limited by the phaseout rule and if it is, whether the reduced credit is limited by your tax liability (regular tax plus AMT minus specified credits).

The potential credit is phased out by 5% of your adjusted gross income in excess of the phaseout threshold, shown below. If the credit, after application of the phaseout rule, is more than your tax liability (25.3), your credit is limited to the liability. However, even if the credit does exceed your tax liability, part or all of the excess credit may be refundable as an additional credit if your earned income exceeds $3,000 or you have three or more children (25.3).

Qualifying child. You can claim the credit for a child who is under age 17 at the end of 2017 if the child is your “qualifying child” under the dependency exemption rules in 21.3 and you are not disqualified (21.3) from claiming an exemption for that child. The qualifying child rules require the child to live with you for over half the year and not provide over half of his or her own support (21.3). The child may be your child, stepchild, grandchild, great-grandchild, brother, sister, stepbrother, stepsister, half-brother or -sister, or the descendant of any of these. An adopted child qualifies for a 2017 credit if placed with you by an authorized agency for legal adoption, even if the adoption is not final by the end of 2017. A foster child placed with you by a court or an authorized agency qualifies. If the child is age 17 or older at the end of 2017, you cannot claim the credit for that child, even if he or she is your “qualifying child” under the dependency exemption rules (21.3).

For purposes of the child tax credit and the additional child tax credit (25.3), the child also must be a U.S. citizen, U.S. resident alien (1.18), or U.S. national. An adopted child who would not otherwise meet this test qualifies if he or she lived with you all year. If the child has an ITIN (not a SSN or ATIN), you must complete Part I of Form 8812 to document that the child meets the “substantial presence” test for a resident alien and is not otherwise treated as a nonresident alien (1.18).

Phaseout of credit. The credit is limited or eliminated if your adjusted gross income is above a threshold amount for your filing status. In applying the phaseout, AGI is increased by any foreign earned income exclusion, foreign housing exclusion or deduction, or possession exclusion for American Samoa residents. If your income exceeds the following threshold for your filing status, see 25.3.

Changing your withholding. If you can claim the child tax credit, you may have too much tax withheld from your wages during the year. If so, you can claim more withholding allowances. File the new Form W-4 with your employer so that less income tax will be withheld.

Consequences if credit is denied. If the IRS disallows your child tax credit or additional child tax credit (25.3), you may be required to document your eligibility before you can claim it for a later year. If either credit is disallowed because you recklessly or intentionally disregarded the rules, you will not be allowed to claim the credit for the next two years, and if you fraudulently claimed it, the disallowance period increases to 10 years.

25.3 Figuring the Child Tax Credit

You use the Child Tax Credit Worksheet in the IRS instruction booklet or in Publication 972 to figure the credit. You do not attach the worksheet to your return.

Phaseout formula. If your income exceeds the phaseout threshold shown in 25.2, the maximum credit of $1,000 per qualifying child is reduced by $50 for each $1,000 (or fraction of $1,000) that your AGI exceeds the phaseout threshold (25.2) for your filing status. The computation is made on the worksheet in the IRS instructions. See Example 2 below.

Liability limitation. The IRS worksheet limits the child tax credit to your tax liability (regular tax plus alternative minimum tax and repayment of excess advance payment of the premium tax credit, if any). If you are subject to the phaseout rule, the amount of the credit allowed after the phaseout computation is subject to the liability limitation. Tax liability is reduced on the worksheet by certain other credits that you claim. If your credit exceeds your liability, the credit is limited to the liability but you may be able to claim the “additional child tax credit”, which is refundable; see below.

Refundable portion of credit claimed as additional child tax credit. If the full amount of the credit cannot be claimed on the Child Tax Credit Worksheet because of the tax liability limitation, you may be able to obtain a refund for the balance in the form of the additional child tax credit. The credit is refundable to the extent of 15% of your taxable earned income plus tax-free combat pay (35.4) in excess of $3,000. If your earned income is not over $3,000, a refundable credit may still be available if you have three or more qualifying children and you paid Social Security taxes that exceed your earned income credit, if any. Follow the IRS instructions to Schedule 8812 (Form 1040A or 1040) for figuring the additional credit. Any portion of the credit that is phased out as discussed above is “lost” and is not eligible for the additional credit on Schedule 8812.

The additional child tax credit is not allowed if you claim the exclusion for foreign earned income (36.1) or employer-financed foreign housing costs (36.4), or if self-employed, the deduction for foreign housing costs (36.4).

If the additional child tax credit is claimed on a return filed at the very beginning of the tax filing season in late January, your anticipated refund may be delayed. The IRS cannot issue a refund before February 15 if the return includes the refundable child tax credit (25.3). The same rule applies to the earned income credit (25.6). The entire refund must be withheld until February 15 and not just the portion of the refund attributable to the refundable child tax credit. The delay in issuing these very early refund claims is intended to give the IRS some extra time to review the returns and reduce improper refund payments.

25.4 Qualifying for the Child and Dependent Care Credit

Did you hire someone to care for your children under age 13 or other dependents while you work? If so, you may qualify for a tax credit for the expenses. The credit is generally available to the extent you have earnings from employment. You may claim the credit even if you work part time. You may claim the credit if you work from home and pay someone to care for your child while you are there. Your employer may have a plan qualifying for tax-free child care and, if you are covered, you may be unable to claim a tax credit (25.5).

Credit requirements. To qualify for the child and dependent care credit, you must:

1. Incur qualifying expenses to care for a qualifying person (see below), so that you can work. Expenses that you incur while looking for work qualify for the credit, but you must have earnings for the year; see Test 2 below. Qualifying expenses must be reduced by tax-free reimbursements received from your employer. Qualifying care expenses and dollar limits are discussed in 25.5.
2. Have earned income for the year. If married, both you and your spouse generally must work, but there is an exception if one of you is a full-time student or is incapacitated; see 25.5 for the exception details (“Earned income rule for married couples”).
3. File jointly if you are married, unless you are separated under the rules discussed below.
4. Hire a care provider other than a person you may claim as your dependent (21.1). Thus, if you pay your mother to care for your child and you cannot claim your mother as a dependent, such payments qualify for the credit, but if you can claim her as your dependent you cannot claim the credit. In addition, no credit may be claimed for payments made to (1) your child who is under 19 years of age at the close of the tax year, whether or not you may claim the child as a dependent, (2) your spouse, or (3) the other parent (who is not your spouse) of your child under age 13 whom you are claiming as your qualifying person.
5. Report on your tax return the name, address, and taxpayer identification number (Social Security number for individuals) of the child-care provider; see below.

Where to claim the credit. The credit is claimed on Form 2441 and attached to Form 1040 or Form 1040A. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000; there is no maximum income for the credit. See Table 25-1 (25.5).

Identifying care provider on your return. On Form 2441, you must list the name, address, and taxpayer identification number of the person you paid to care for your dependent. If the care provider is an individual, his or her Social Security number is required. If the provider is a business, enter its employer identification number (EIN), but you do need to enter a taxpayer identification number if the care provider is a tax-exempt organization. Failure to list the correct name, address, and identifying number may result in a disallowance of the credit. To avoid this possibility, ask the provider to fill out Form W-10 or get the identifying information from a Social Security card, driver’s license, or business letterhead or invoice. If a household employee has filled out Form W-4 for you, this may act as a backup record.

Withholding tax for a housekeeper. Where you employ help to care for your dependent in your home, you may be liable for FICA (Social Security) and FUTA (unemployment) taxes (38.3).

Are you married but separated from your spouse? If you are married at the end of the year, you generally must file a joint return to claim the dependent care credit, but you are treated as unmarried and may claim the credit when you file as married filing separately, provided you meet all of the following tests:

1. You lived apart from your spouse during the last six months of the year;
2. Your home was the home of the qualifying person (see below) for more than half the year, and
3. You paid over half the cost of maintaining the household for the entire year.

If you satisfy these three tests, you do not have to take your spouse’s income into account when applying the credit percentage shown at 25.5.

If you are divorced or separated and are the custodial parent. If you are the custodial parent of your child who was under age 13 or physically or mentally incapable of caring for himself or herself, you may claim the credit even though you waived the exemption for your child in favor of the noncustodial parent on Form 8332 (or equivalent) under the special rules for divorced or separated parents at 21.7. You are the custodial parent if your child lived with you for more nights during the year than with his or her other parent. If your child stayed with each of you an equal number of nights, you are treated as the custodial parent if your adjusted gross income is higher than the other parent’s adjusted gross income (21.7). The noncustodial parent cannot treat the child as a qualifying person even though he or she claims the exemption under the special rules.

Who is a Qualifying Person for Credit Purposes?

To claim the dependent care credit, you must incur employment-related expenses (25.5) for at least one of the following qualifying persons who lives with you more than half the year:

1. A dependent under the age of 13 who is your “qualifying child” under 21.3. If you are divorced or separated, and you resided with the child for a longer time during the year than the other parent, you may be able to claim the credit even if the other parent is entitled to claim the child as a dependent; see above.

   If your child becomes age 13 during the year, take into account expenses incurred for his or her care prior to the 13th birthday. However, you do not prorate the $3,000 limitation on expenses (25.5). For example, if your child had her 13th birthday on May 1, 2017, and you incurred $3,000 or more in care expenses between January 1 and April 30, the entire $3,000 qualifies for the 2017 credit.

2. Your spouse, if physically or mentally incapable of caring for him- or herself.
3. A dependent, regardless of age, who is physically or mentally incapable of caring for himself or herself. For example, he or she needs help to dress or to take care of personal hygiene or nutritional needs, or requires constant attention to avoid hurting him- or herself or others. Generally, you must be able to claim the person as a dependent, either as your qualifying child (21.3) or qualifying relative (21.4), but even if the person cannot be claimed as your qualifying relative because he or she has gross income of $4,050 or more for 2017, you may still claim a credit for his or her care costs. Also, if you cannot claim an exemption for the person because he or she filed a joint return, or because you (or your spouse if you file jointly) can be claimed as a dependent by another taxpayer (21.1), you can still claim the credit for care costs that otherwise qualify.

25.5 Figuring the Dependent Care Credit

In figuring the credit on Form 2441, you may take into account up to $3,000 of the following types of expenses when figuring the credit for one dependent, or up to $6,000 for two or more dependents. If you receive employer-financed dependent care, tax-free reimbursements reduce the $3,000 or $6,000 base.

1. Costs of caring for your qualifying child under age 13, incapacitated spouse, or incapacitated dependent (of any age) in your home (25.4). If you pay FICA or FUTA taxes on your housekeeper’s wages (38.3), you may include your share of the tax (employer) as part of the wages when entering your qualifying expenses. Also include your housekeeper’s share of FICA tax if you pay it. Note that these taxes may more than offset your allowable credit.

   The manner of care need not be the least expensive alternative. For example, where a grandparent resides with you and may provide adequate care for your child to enable you to work, the cost of hiring someone to care for the child is still eligible for the credit.

2. Ordinary domestic services in your home, such as laundry, cleaning, and cooking (but not payments to a gardener or chauffeur) that are partly for the care of the qualifying person. Expenses for the dependent’s food, clothing, or entertainment do not qualify. Food costs for a housekeeper who eats in your home may be added to qualifying expenses. Extra expenses for a housekeeper’s lodging (extra rent or utilities) also qualify.

3. Outside-the-home care costs for a child under age 13, as in a day-care center (must meet all state and local regulations and provide care services for over 6 persons), a day camp (including a specialty camp such as a computer or soccer camp), nursery school, or in the home of a babysitter. Outside-the-home care costs also qualify if incurred for a handicapped dependent, regardless of age, provided he or she regularly spends at least eight hours per day in your home. However, the cost of schooling in kindergarten or higher does not qualify for the credit. Costs for sleep-away camp also do not qualify for the credit.

   You may not take into account your transportation costs in taking your qualifying person to and from a care center, or your payment of a care provider’s transportation to and from your home.

Limits on Eligible Expenses

In figuring the credit, you take into account qualifying expenses up to a limit of $3,000 for one qualifying person, or $6,000 for two or more qualifying persons. The $3,000 or $6,000 limit applies even if your actual expenses are much greater. Further, the $3,000 or $6,000 limit must be reduced by tax-free benefits received from an employer’s dependent care plan, as discussed below. Finally, if your earned income is less than the $3,000 or $6,000 limit, your credit is figured on the lower income amount; see the earned income rule for married couples below.

Earned income rule for married couples. Generally, both spouses must work (wages, salary, or self-employment) at least part time to claim the credit, unless one is incapable of self-care or is a full-time student. If either you or your spouse earns less than the maximum $3,000 or $6,000 credit base, the base is limited to the smaller earned income. However, for each month you or your spouse is a full-time student or is disabled, that spouse is considered to have earned income of $250 if care expenses are incurred for one dependent, or $500 for two or more dependents, even if the spouse had no earnings or earnings under $250/$500 for the month. A full-time student is one who attends school full time during each of five calendar months during the year, whether or not the months are consecutive. A spouse who is incapable of self care is considered disabled for purposes of the $250/$500 rule.

Employer-financed dependent care reduces credit base. Tax-free reimbursements under an employer’s dependent care program (3.5) reduce the $3,000 or $6,000 credit base. For example, if you have one child and you receive a $1,500 reimbursement of child-care costs from your company’s plan, the amount eligible for the tax credit is reduced to $1,500 ($3,000 – $1,500). A reimbursement of $3,000 or more would bar any credit. The $6,000 credit expense limit for two or more dependents is similarly reduced by dependent care benefits from your employer. On your Form W-2, your employer will report the amount of tax-free reimbursement (3.4).

If your employer’s plan allows you to fund a reimbursement account with salary-reduction contributions that are excluded from taxable pay (3.14), reimbursements from the account are considered employer-financed payments that reduce the $3,000 or $6,000 credit base. In deciding whether to make salary-reduction contributions, you should determine whether the tax-free salary reduction will provide a larger tax savings than that provided by the credit. You may find that the salary reduction provides the larger tax savings, taking into consideration not only the decrease in federal income tax, but also the Social Security tax and state and local taxes avoided by using the salary reduction. Further, by lowering your adjusted gross income, a salary reduction may enable you to claim a larger IRA deduction if you are subject to the deduction phase-out rule (8.4), or a larger deduction for miscellaneous itemized deductions subject to the 2% floor (19.1).

How to treat prepayments and payments of prior year expenses. Your credit for 2017 generally must be based on payments you made in 2017 for qualifying care services provided in 2017. There is an exception if in 2016 you prepaid for 2017 qualifying services; claim the 2016 prepayment as a qualifying expense paid in 2017 when you figure your 2017 credit on Form 2441.

If you paid for 2016 services in 2017, you may be able to claim an additional credit on your 2017 return, but only in limited circumstances. Specifically, payments made in 2017 for 2016 services may be eligible for an additional credit on your 2017 return but only if you did not use up the $3,000 or $6,000 expense limit that applied for the 2016 credit. Follow the instructions for Form 2441 to figure the additional credit.

If in 2017 you prepaid for 2018 services, you must allocate your payment. Only 2017 payments for 2017 services should be counted toward the $3,000 or $6,000 limit when figuring your 2017 credit; the prepayment for 2018 services will count as a 2018 expense in figuring the credit for 2018.

Allocating expenses when employed less than an entire year. If your dependent care expenses covered a period in which you worked or looked for work only part of the time, you must allocate the expenses on a daily basis to determine the work-related portion. However, if you were away on vacation or missed work due to illness for a short period, this is treated as a temporary absence from work and the expenses incurred during the absence qualify for the credit. The IRS considers an absence from work of two weeks or less as temporary; an absence of more than two weeks may be temporary depending on the facts and circumstances.

Allocation if expenses cover noncare services. If a portion of expenses is for other than dependent care or household services, only the portion allocable to dependent care or household services qualifies. No allocation is required if the non–dependent care services are minimal.

Credit percentage

Depending on your adjusted gross income (AGI), a credit percentage of 20% to 35% applies to your expenses up to the $3,000 (one dependent) or $6,000 (two or more dependents) limit. The maximum credit is 35% for families with AGI of $15,000 or less. The 35% maximum credit percentage is reduced by 1% for each $2,000 of AGI or fraction of $2,000 over $15,000, but not below 20%. The minimum credit percentage of 20% applies where AGI exceeds $43,000, regardless of how high AGI is.

The dependent care credit is nonrefundable. It is limited to your tax liability; follow the IRS instructions.

25.6 Qualifying Tests for EIC

The earned income credit (EIC) is generally claimed by workers with qualifying children who meet the tests below, but in limited cases the credit is allowed to childless workers. Taxpayers with three or more qualifying children get a higher credit rate than taxpayers with fewer children. Also, a more favorable phaseout range is allowed for married couples filing jointly.

For 2017, the maximum EIC is $3,400 if you have one qualifying child, $5,616 if you have two qualifying children, $6,318 if you have three or more qualifying children, and $510 if you do not have a qualifying child. However, the maximum credit is subject to a phaseout based on income (25.7). The allowable credit is “refundable,” meaning that you will receive a refund from the IRS if the credit exceeds your tax liability.

After completing a worksheet in the IRS instructions that determines whether your earned income credit (EIC) is based on your earned income or adjusted gross income (25.7), you then look up the amount of your credit in the EIC Table. The EIC Table will appear in the e-Supplement at jklasser.com.

Earliest refund claims delayed until February 15. Taxpayers who claim the earned income credit and file their returns as soon as the tax filing season begins in January may face a slight delay in getting a refund. The IRS cannot issue a refund before February 15 if the return includes the earned income credit. The same rule applies to returns claiming the refundable child tax credit (25.3). The entire refund must be withheld until February 15 and not just the portion of the refund attributable to the earned income credit or the refundable child tax credit. The delay in issuing these very early refund claims is intended to give the IRS some extra time to review the returns and reduce improper refund payments.

Claiming the EIC for 2017 if You Have One or More Qualifying Children

You may claim the EIC on a 2017 return if you:

• Are single, head of household, or a qualifying widow/widower with earned income, such as wages and self-employment earnings, and also adjusted gross income (AGI), under $39,617 if you have one qualifying child, $45,007 if two qualifying children, or $48,340 if you have three or more qualifying children.

  If you are married filing jointly, earned income and AGI must be less than $45,207 if you have one qualifying child, $50,597 if you have two qualifying children; or $53,930 if you have three or more qualifying children.

  If both your earned income and AGI equals or exceeds the applicable amount, the credit is completely phased out, so if your income is close to these amounts your credit will be low. The credit begins to phase out at much lower income levels (25.7).

• Have a qualifying child who lived with you in your main home in the U.S. for more than six months in 2017; see below.
• File a joint return if married. Married persons filing separately may not claim the EIC. If you lived apart from your spouse for the last half of the year, you may be able to claim the credit as a head of household.
• File Schedule EIC with your Form 1040 or Form 1040A. On Schedule EIC, you identify and provide information about a qualifying child. Your child’s Social Security number must be entered on Schedule EIC.
• Are not a qualifying child of another person.
• Include on your return your Social Security number and, if married, that of your spouse.

To claim the credit, your Social Security number (and if married, your spouse’s) and the Social Security numbers of your qualifying children must be obtained by the due date of your return, including any extension; see the Law Alert in this section.

A qualifying child. A qualifying child is your son, daughter, adopted child, stepchild, grandchild or other descendent of any of these (your great-grandchild) who at the end of the year is under age 19 or under age 24 and a full-time student (enrolled full time during any five months), or any age if permanently and totally disabled. The qualifying person must live with you for over half the year. Your brother, sister, step- or half-brother or step- or half-sister, or their descendents (your niece or nephew), who meets the age 19 or 24 test and lives with you more than half the year also qualifies if he/she is younger than you (or your spouse if you file jointly) or is permanently and totally disabled. A foster child who lives with you for more than half the year qualifies if the child was placed with you by a court order or by an authorized placement agency.

The child must have a valid Social Security number to be treated as a qualifying child; see the Law Alert in this section.

Household requirement. The qualifying child must have lived with you in your main home in the U.S. for more than six months. Temporary absences for school, vacation, medical care, or detention in a juvenile facility count as time lived at home.

A person in the U.S. Armed Forces who is stationed outside the U.S. on extended active duty is treated as maintaining a main residence within the U.S.

If you are married, you must file a joint return with your spouse to claim the credit. However, if your spouse did not live in your household for the last six months of the year, and you maintained a home for a child who lived with you for more than half of the year, you may claim the credit as a head of household (1.12) .

Permanently and totally disabled. A person is permanently and totally disabled if: (1) he or she cannot engage in any substantial gainful activity because of a physical or mental condition and (2) a physician determines that the condition has lasted or is expected to last for at least a year or lead to death.

Qualifying child of two or more people. “Tie-breaking” rules determine who can take the EIC if a child is a qualifying child of more than one person.

If both parents are eligible to claim the credit for the same qualifying child and they do not file a joint return, the parent with whom the child resided for the longer period during the year may claim the child. If the child lived with each parent for the same amount of time, the child will be treated as the qualifying child of the parent who had the higher adjusted gross income (AGI).

If a parent and one or more nonparents are otherwise entitled to claim the child as a qualifying child, only the parent may claim the credit for the child. If none of the persons otherwise entitled to treat the child as a qualifying child are the child’s parent, the child will be treated as the qualifying child of the person who had the highest AGI for the year.

A taxpayer who “loses” under the tie-breaker rule, and who thus cannot claim a child as his or her qualifying child for EIC purposes, may still be allowed to claim the EIC under the rules below for taxpayers without a qualifying child (the childless EIC). A 2017 proposed regulation would allow the childless EIC to be claimed by a taxpayer who otherwise qualifies; this reverses an earlier IRS position that prevented the childless EIC to be claimed in this situation. For example, a baby lives with her mother and grandmother in the grandmother’s home. The baby “could be” the qualifying child of both the mother and the grandmother, but under the tie-breaker rule, only the mother can treat the baby as her qualifying child, so she can claim the EIC for one qualifying child. Under the proposed regulation, the grandmother can claim the childless EIC if she meets the tests below.

Married child. If your child was married at the end of the year, he or she is your qualifying child only if you can claim an exemption for the child under the rules at 21.3, or you would be so entitled except that the noncustodial parent is given the exemption under the rules at 21.7. However, if your child files a joint return, he or she is not your qualifying child unless the joint return is filed only as a refund claim.

Nonresident aliens. An individual who is a nonresident alien for any part of the year is not eligible for the credit unless he or she is married and an election is made by the couple to have all of their worldwide income subject to U.S. tax.

Claiming the Childless EIC for 2017 if You Have No Qualifying Children

If you do not have a qualifying child, you may claim the childless EIC on a 2017 return if you:

• Have earned income, such as wages and self-employment earnings and also adjusted gross income under $15,010 ($20,600 if married filing jointly). These are the amounts at which the credit is completely phased out. The phaseout threshold is considerably lower (25.7).
• Have your main home in the U.S. for more than six months in 2017 .
• Are at least 25 but under age 65 at the end of 2017. If filing a joint return, either you or your spouse must satisfy this age test.
• File a joint return if married, unless you lived apart for the last six months and qualify to file as a head of household.
• Are not a dependent of another taxpayer. If filing jointly, your spouse also must not be another taxpayer’s dependent.
• Are not a qualifying child of another taxpayer. If filing jointly, your spouse also must not be another taxpayer’s qualifying child.
• Include your Social Security number on your return, and, if married, that of your spouse. You must have the Social Security number by the due date of your return, including extensions; see the Law Alert at the beginning of 25.6.

25.7 Income Tests for Earned Income Credit (EIC)

For purposes of the credit, earned income includes wages, salary, tips, commissions, jury duty pay, union strike benefits, and net earnings from self-employment. If you retired on disability and you receive payments from the employer’s plan that are reported as taxable wages, such disability benefits are considered earned income for EIC purposes until you reach minimum retirement age under the employer’s plan. Once you reach minimum retirement age, the payments are treated as a pension and not earned income.

An election may be made to include combat pay that is otherwise excluded from income (35.4) as earned income for EIC purposes. Apart from such combat pay, nontaxable employee compensation, such as salary deferrals, or excludable dependent care benefits, is not considered when computing the credit.

Disqualifying income. For 2017, an individual is not eligible for the earned income credit if he or she has “disqualified income” exceeding $3,450. Disqualified income includes interest (taxable and tax-exempt), dividends, net rent and royalty income, net capital gain income, and net passive income that is not self-employment income.

Credit phases out with income. There are different phaseout ranges for married couples filing jointly than for taxpayers filing as single, head of household, or qualifying widow/widower.

If your filing status is single, head of household, or qualifying widow/widower, and you have qualifying children, your 2017 credit begins to phase out in the EIC Table if either earned income or adjusted gross income is at least $18,350, regardless of the number of children. The phaseout endpoint depends on the number of children. The credit is completely phased out if earned income or adjusted gross income is at least $39,617 for one child, $45,007 for two children, and $48,340 for three or more children.

If you are married filing jointly and have qualifying children, the 2017 credit begins to phase out in the EIC Table if either earned income or adjusted gross income is at least $23,950, regardless of the number of children. The phaseout endpoint depends on the number of children. The credit is completely phased out if earned income or adjusted gross income is at least $45,207 for one child, $50,597 for two children, and $53,930 for three or more children.

If you do not have any qualifying children, the phaseout of the childless EIC begins in the EIC Table when either earned income or AGI is at least $8,350, or $13,950 if married filing jointly, and the credit is completely phased out if either amount is $15,010 or more, or $20,600 or more if married filing jointly.

Self-employed. If you were self-employed in 2017, your earned income for EIC purposes is the net earnings shown on Schedule SE, less the income tax deduction for self-employment tax claimed on Line 27 of Form 1040. If your net earnings were less than $400, the net amount is your earned income for purposes of the credit. If you had a net loss, the loss is subtracted from any wages or other employee earned income. If you are a statutory employee, the income reported on Schedule C qualifies for the credit.

Foreign earned income. If you work abroad and claim the foreign earned income exclusion, you may not take the EIC.

25.8 Qualifying for the Adoption Credit

A tax credit of up to $13,570 may be available on your 2017 return for the qualifying costs of adopting an eligible child. An eligible child is a child under age 18, or any person who is physically and mentally incapable of self-care. The credit is phased out ratably for those with modified adjusted gross income between $203,540 and $243,540.

The credit is claimed on Form 8839. Special credit timing rules apply. If you paid qualifying adoption costs in 2017 but the adoption was not final at the end of the year, the credit may not be claimed on your 2017 return (25.9).

If you are married, you generally must file a joint return to take the adoption credit or exclusion, even if only one spouse is adopting the child. You may take the credit or exclusion on a separate return if you are legally separated under a decree of divorce or separate maintenance, or if you lived apart from your spouse for the last six months of the tax year and (1) your home is the eligible child’s home for more than half the year and (2) you pay more than half the cost of keeping up your home for the year.

Qualified adoption expenses. Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, travel expenses away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. Do not include expenses paid or reimbursed by your employer or any other person or organization. You may not claim a credit for the costs of a surrogate parenting arrangement or for adopting your spouse’s child.

Employer plans. As discussed in 3.6, an exclusion from income is also available to employees if adoption expenses are paid through a qualifying employer program, subject to rules similar to that of the credit. If you receive employer adoption benefits that are less than your qualifying adoption expenses, you may be able to claim the credit on Form 8839.

25.9 Claiming the Adoption Credit on Form 8839

The fact that you paid qualified adoption expenses during 2017 does not mean that you can claim a credit for those costs on your 2017 return. A 2017 credit is not allowed for 2017 expenses unless the adoption was finalized by the end of the year. Under the credit timing rules discussed below, you may claim a 2017 credit for expenses incurred in 2016 if the eligible child was a U.S. citizen or resident when the adoption effort began, even if the adoption is still not final at the end of 2017. If the child was not a U.S. citizen or resident when the adoption effort began, a credit is not allowed until the year the adoption is finalized even if you incurred expenses in one or more previous years.

If a credit is allowed for 2017, figure it on Form 8839 and attach the form to your Form 1040. You must enter an identification number for the child on Form 8839. Generally this is a Social Security number (SSN), but if you are in the process of adopting a child who is U.S. citizen or resident and you cannot get an SSN for the child before you file your return, you should apply for an adoption taxpayer identification number (ATIN) on IRS Form W-7A. If the child is not eligible for an SSN, apply for an individual identification number (ITIN) on Form W-7.

When to claim the adoption credit for a child who is a U.S.citizen or resident (U.S. child). If at the time the adoption effort begins the child is a U.S. citizen or resident and you pay qualifying expenses in any year before the year the adoption becomes final, the credit is delayed one year. The credit is allowed in the year after the year of the payment, whether or not the adoption is final in that year. If you pay qualifying expenses in the year the adoption becomes final, the credit for those expenses is claimed in that year. If qualifying expenses are paid in any year after the year in which the adoption becomes final, the credit is claimed in the year of payment.

When to claim the adoption credit for a child who is not a U.S.citizen or resident (foreign child). If you pay qualifying expenses to adopt a child who is not a U.S. citizen or resident at the time the adoption effort begins, a credit may not be claimed until the year the adoption becomes final. If adoption expenses are paid after the tax year in which the adoption became finalized, a credit for such expenses is allowed for the tax year of payment.

The IRS has released safe harbors for determining the finality of an adoption of a foreign-born child and thereby the timing of a credit. These safe harbors apply only to adoptions of foreign-born children who receive an “immediate relative” (IR) visa from the State Department. IR visas are issued to a foreign-born child entering the U.S. after a foreign court or government agency (with authority over child welfare) has granted an adoption or guardianship decree.

If there is an adoption proceeding in a foreign country that is not a party to the Hague Adoption Convention, and the adopting parents bring a foreign-born child into the U.S. with an IR-2 visa, an IR-3 visa, or an IR-4 visa (if a “simple” adoption), the parents may treat the adoption as final in either (1) the taxable year in which the foreign court or agency enters the adoption decree or, (2) the taxable year in which a court in the parents’ home state enters a decree of “re-adoption” or the home state otherwise recognizes the foreign adoption decree, provided this occurs in one of the two years after the year in which the foreign court or agency enters its decree. If the child receives an IR-4 visa under a guardianship or legal custody arrangement, the adoption may not be treated as final for tax purposes until the year in which a court in the parents’ home state enters a decree of adoption.

For a foreign adoption finalized abroad that is governed by the Hague Adoption Convention, the adoption may be treated as final in either the year the foreign country entered the final decree of adoption, or the year the U.S. Secretary of State issued a Hague Adoption Certificate (IHAC).

Credit limit and phaseout. The maximum adoption credit on a 2017 return is $13,570 per child, before application of the phaseout rule. The limit is per child, not per taxpayer. If the parents are not spouses filing a joint return, and, to adopt the same child, each parent paid expenses that are allowed in 2017 under the credit timing rules, the parents must divide the $13,570 limit between them.

If under the credit timing rules you are claiming adoption expenses for a child on Form 8839 for 2017, but you claimed expenses for the same child in an earlier year, the earlier expenses reduce the $13,570 maximum credit for 2017. If under the credit timing rules you are allowed a 2017 credit for more than one child, a separate $13,570 limit applies for each. However, if an adoption of a child with special needs is finalized in 2017, the maximum $13,570 credit is allowed even if this amount exceeds your qualified adoption expenses; see below.

The credit may be reduced or eliminated on Form 8839 by a phaseout rule based on modified adjusted gross income (MAGI). For 2017, the phaseout applies if MAGI exceeds $203,540. The phaseout range is $40,000, so the credit for 2017 is completely phased out if MAGI is $243,540 or more.

After application of the phaseout rule, you also must apply the liability limit. The credit cannot exceed your tax liability (regular tax plus AMT if any), reduced by various other tax credits. If you are unable to use the full credit because it exceeds the liability limit, the excess credit can be carried forward for up to five years.

Special needs adoption. A special rule allows qualifying expenses to be grossed up to the maximum credit in the year the adoption is finalized where the aggregate of qualifying expenses for that year and all prior years is under the maximum. For example, if a special needs adoption is initiated in 2016 and finalized in 2017 and actual qualifying expenses for both years are $9,020, a $13,570 credit may be claimed for 2017, subject to the phaseout rule and liability limit. Total expenses are deemed to be the $13,570 maximum, so the credit for 2017 includes not only the $9,020 of actual expenses, but also an additional $4,550, the excess of $13,570 over the actual expenses. This special rule applies only to finalized special needs adoptions.

An adoption is considered a “special needs” adoption if the child is a U.S. citizen or resident when the adoption process begins, and a state (or District of Columbia) determines that the child cannot or should not be returned to his or her parents and that because of special factors, assistance is required to place the child with adoptive parents. Without a formal determination by the state that the child has special needs that justify providing financial assistance to the adoptive parents, the adoption is not treated as a special needs adoption. In one case, adoptive parents claimed that the fact that they had adopted a biracial child automatically entitled them to use the full credit amount allowed for finalized special needs adoptions, but a federal district court disagreed. There was no state determination of special needs, so the special needs credit rule did not apply.

25.10 Eligibility for the Saver’s Credit

You may be able to claim the retirement savings contributions credit (saver’s credit) on your 2017 return if you, or your spouse if filing jointly, made contributions (25.11) to a retirement plan for 2017. This includes a contribution made to a traditional IRA or Roth IRA (including a myRA) for 2017 by April 17, 2018.

Eligibility for the saver’s credit is restricted. You cannot claim the credit for 2017 contributions you made if any of the following are true:

1. Your adjusted gross income exceeds $62,000 if married filing jointly, $46,500 if a head of household, or $31,000 if single, married filing separately, or a qualifying widow or widower, Adjusted gross income is increased by any exclusion for foreign earned income or income from Puerto Rico or American Samoa, or the foreign housing exclusion or deduction.
2. You were born after January 1, 2000. That is, you must be age 18 or older on January 1, 2018, to claim the credit for 2017.
3. You are claimed as a dependent on another taxpayer’s 2017 return.
4. You were a full-time student during any part of five or more months in 2017.

If you are not disqualified from claiming the credit under tests 1-4 above, you generally may claim a credit on Form 8880 based on the first $2,000 of your retirement contributions, but only after contributions are reduced by recent retirement plan withdrawals (25.11). As shown in Table 25-2, the credit percentage declines from 50% to 20% to 10% as income approaches the applicable $62,000, $46,500, or $31,000 limit.

Details on figuring the credit are in 25.11. Any allowable credit is in addition to other tax breaks you may receive for making the contribution, such as the exclusion for elective salary deferrals to a 401(k) plan, or a deduction for a traditional IRA contribution.

25.11 Figuring the Saver’s Credit

You figure your saver’s credit on Form 8880. The maximum credit for 2017 equals the applicable income-dependent rate shown in Table 25-2 (50%, 20%, or 10%) multiplied by the first $2,000 of eligible retirement contributions made for the year. If you are married filing jointly, you and your spouse may each take into account up to $2,000 of eligible contributions. Eligible contributions include: (1) contributions to a traditional IRA or Roth IRA (including a myRA (8.26)), (2) salary-reduction contributions to a 401(k) plan (including a SIMPLE 401(k)), 403(b) plan, SIMPLE IRA, governmental Section 457 plan, or salary-reduction SEP, or (3) voluntary after-tax contributions to a qualified plan or 403(b) plan.

Note in Table 25-2 that the 20% credit bracket is extremely narrow, so as a practical matter, most eligible taxpayers will qualify for either the 50% or 10% credit percentage.

Withdrawals can eliminate the credit. A credit can be lost because you have withdrawn money from a retirement plan. In figuring a credit for 2017, your eligible contributions for 2017 must be reduced by the total of distributions you received (and also your spouse if filing jointly) after 2014 and before the due date of your 2017 return (including extensions) from traditional IRAs and Roth IRAs, 401(k) plans, SEPs, SIMPLE plans, 403(b) plans, and other qualified retirement plans. Do not count tax-free rollovers, direct transfers (trustee-to-trustee), conversions of a traditional IRA to a Roth IRA, in-plan rollovers from a 401(k) plan to a designted Roth account, distributions of excess contributions or deferrals, or returned contributions; see the instructions to Form 8880.

Tax liability limit. The credit is not refundable. It is limited to your tax liability (regular tax plus AMT, if any), reduced by certain other nonrefundable credits such as the child and dependent care credit or the American Opportunity or Lifetime Learning credits.

25.12 Premium Tax Credit

If you bought health care coverage in 2017 through a government exchange (also called “The Health Insurance Marketplace”) and your household income is between 100% and 400% of the federal poverty line, you may be able to claim a tax credit on Form 8962 when you file your 2017 return. See the Sample Form 8962 below. If, like most Marketplace applicants, you received an advance of the credit that went right to your insurance company and was applied to your monthly premiums, you will have to reconcile the advance payments you received with the actual credit that you are entitled to on Form 8962. The advance payments may have been too much or too little, depending on changes to your income or family composition between the time you received the advance payments and when you file your 2017 return.

If your allowable credit on Form 8962 exceeds the advance payments, the excess, called the “Net Premium Tax Credit,” can be claimed as a refundable credit on Form 1040 (line 69) or Form 1040A (line 45). As a refundable credit, it will be paid to you even if it exceeds your tax liability.

However, if your advance payments exceed the allowable credit, you must pay back the excess, but there is a limit on the required repayment (shown below). The repayment is an additional tax that must be reported on Line 46 of Form 1040 or Line 29 of Form 1040A. You may not file Form 1040EZ if you received advance payments of the credit or are entitled to a net credit.

To complete Form 8962, you will need to enter amounts shown on Form 1095-A, which you will receive from the Marketplace through which you obtained coverage. Form 1095-A will provide a month-by-month breakdown of the coverage premiums for you and your family and show the advance payments you received.

Eligibility for the premium tax credit. You must have purchased health coverage through the Marketplace and must meet these requirements to be eligible for a 2017 premium tax credit:

1. Your household income for 2017 is at least 100% and no more than 400% of the poverty level for your family size. Household income is the modified adjusted gross income (MAGI) for you, your spouse, (if filing jointly) and your dependents who are required to file a tax return. MAGI is regular AGI increased by tax-exempt interest, the nontaxable part of Social Security benefits, and excluded foreign earned income. The Form 8962 instructions have worksheets for figuring MAGI and federal poverty tables that show the federal poverty line for your family size, depending on whether you live in the 48 contiguous states (and Washington DC), Alaska, or Hawaii.
2. You are not eligible for coverage from an employer plan or from a government plan (including Medicaid or Medicare). If you were offered employer plan coverage, but it was unaffordable or did not provide minimum value, the offered coverage does not block eligibility for the credit. The employer coverage is considered “unaffordable” for 2017 if the premium for self-only coverage exceeds 9.69% of your household income. You also remain eligible if the employer plan does not cover at least 60% of the cost of covered services; your employer must provide you with a plan summary that indicates if the plan meets the 60% test.
3. If married, you must file jointly. However, if you have been the victim of domestic abuse or abandoned by your spouse, you can claim the credit as a married person filing separately.
4. You cannot be claimed as a dependent by another taxpayer.
5. You bought your coverage through the Marketplace. Purchasing identical coverage directly from the insurer disqualifies you from claiming the credit.

Figuring the credit on Form 8962. In Part I of Form 8962 (see the Sample form), you compare your household income to the applicable federal poverty line. If the combined MAGI for you, your spouse (if filing jointly) and your dependents (who are required to file) is no more than four times larger (400%) than the applicable federal poverty line, you are eligible for a credit. If your income exceeds 400% of the poverty line, you are not entitled to any credit and must repay any advance payments you received.

If eligible, you figure your credit based on the premiums for your policy, your contribution amount, and the Marketplace premium for the second lowest cost silver plan (SLCSP) for your family in your local area.

Contribution amount. Your contribution amount is the amount you are required by law to contribute toward your coverage. Your annual contribution amount is your household income multiplied by the “applicable percentage” for your income level, shown in the “applicable figure” table in the Form 8962 instructions. As the percentage of household income to the federal poverty line increases (from 100% of the federal poverty line to 400%), your contribution percentage increases. For 2017, the contribution percentages range from a low of 2.04% to a high of 9.69%; the maximum percentage of 9.69% applies when household income is 300% through 400% of the federal poverty line.

Premium amount for SLCSP. The Form 1095-A you get from the Marketplace will give you the monthly premium for the second lowest cost silver plan (SLCSP) for your family in your local area. The SLCSP is referred to as the “reference” or “benchmark” plan and the SLCSP premium is used to calculate the monthly advance payments as well as the allowable credit on Form 8962, regardless of what coverage plan you actually have.

Credit figured on annual or monthly basis. In Part II of Form 8962, the maximum full-year credit is the lesser of (1) the annual premium for your policy, or (2) the excess of the annual SLCSP premium over your annual contribution amount. However, if Form 1095-A shows that you did not have Marketplace coverage for the whole year, or there were monthly changes to your premiums or to the SLCSP premiums, you have to figure your credit on a monthly basis. That is, for each month, you get a credit equal to the lesser of (1) the monthly premium amount for your coverage, or (2) the excess of the monthly SLCSP premium over your monthly contribution amount (1/12 of the annual contribution amount described above). Your Form 1095-A has the annual and monthly premium and SLCSP amounts; you enter these on Part II of your Form 8962.

You must then compare the allowable credit, either the annual amount or the total of the monthly amounts, to your advance payments. The advance payments, which are shown on Form 1095-A, must be entered in Part II of Form 8962. If the credit exceeds the advance payments, the excess is the “net premium tax credit” you are entitled to claim on your Form 1040 (Line 69) or Form 1040A (Line 45). However, if the advance payments exceed the credit, you must make a repayment; see below.

Repayment of excess advance payments. The excess of your advance payments over the allowable credit must be added to the tax you owe on your 2017 Form 1040 (Line 46) or Form 1040A (Line 29). There is a cap on the required repayment based on filing status and income, provided your household income is under 400% of the federal poverty line for your family size.

If your filing status is married filing jointly, head of household, or qualifying widow/widower, the maximum repayment is twice as much as it is for single taxpayers; see Table 25-3 below.

For 2018, the repayment limits may be increased by an inflation adjustment; see the e-Supplement at jklasser.com.

25.13 Health Coverage Credit

The Health Coverage Tax Credit (HCTC) provides a 72.5% credit on Form 8885 to eligible individuals for premiums paid on qualifying health insurance that covers them, their spouse, and qualifying family members. Advance monthly payments of the credit are available; see below.

Eligible individuals are: displaced workers who have lost jobs due to foreign competition and are receiving Trade Adjustment Assistance (TAA) benefits, older workers receiving wage subsidies under an alternative trade adjustment assistance (ATAA) program or reemployment trade adjustment assistance (RTAA) program established by the Department of Labor, and Pension Benefit Guaranty Corporation (PBGC) pension beneficiaries age 55 to 65 who are not enrolled in Medicare.

The HCTC applies to premiums you paid for coverage under an individual (non-group) health insurance plan purchased from an insurance company, agent or broker. The HCTC does not apply to coverage purchased through the Health Insurance Marketplace (federally-administered or state exchange), but the premium tax credit may be available (25.12).

In addition to individual health plan coverage (non-Marketplace), the HCTC applies to premiums for COBRA continuing coverage and coverage under a spouse’s employer-sponsored plan, provided that your former employer or your spouse’s employer did not pay 50% or more of the cost. Coverage through certain state-sponsored plans also qualify.

The HCTC may not be claimed for any month that you are enrolled in Medicare (Part A, B, or C), Medicaid, CHIP, FEHBP, or TRICARE and coverage for family members does not qualify if they are enrolled in such plans. However, once you enroll in Medicare, the HCTC generally can be claimed for eligible coverage of your qualified family members for 24 months.

Credit eligibility is determined on a month-by-month basis on Form 8885. If an “advance” of the credit was received (see below) and applied to the premiums for a month, no further credit for that month is allowed on Form 8885. The credit from Form 8885 is entered in the “Payments” section of Form 1040 on Line 73 as a refundable credit that is not limited by tax liability.

Advance monthly payments of the HCTC. You can receive the benefit of the HCTC on a monthly basis by enrolling on Form 13441-A (“Health Coverage Tax Credit (HCTC) Monthly Registration and Update”). After the IRS informs you that your registration is confirmed and you have been certified for advance monthly payments, you must pay 27.5% of your health insurance premiums to the advance monthly payment program and the program will then add the 72.5% advance portion and forward the entire amount to your health plan administrator each month.

25.14 Mortgage Interest Credit

Under special state and local programs, you may obtain a “mortgage credit certificate” to finance the purchase of a principal residence or to borrow funds for certain home improvements. Generally, a qualifying principal residence may not cost more than 90% of the average area purchase price, 110% in certain targeted areas. A tax credit for interest paid on the mortgage may be claimed. The credit is computed on Form 8396 and claimed on Form 1040. The credit equals the interest paid multiplied by the certificate rate set by the governmental authority, but if the credit rate is over 20%, the credit is limited to $2,000.

Liability limit and carryover. The mortgage interest credit is subject to a tax liability limit and any excess is nonrefundable. The tax liability limitation is figured on Form 8396. However, if your allowable credit exceeds the liability limitation, the unused credit can be carried forward for up to three years.

Mortgage interest deduction must be reduced. If you itemize deductions, you must reduce your home mortgage interest deduction (15.1) by the tentative (prior to liability limit) mortgage interest credit shown on Line 3 of Form 8396 (certificate credit rate multiplied by interest paid, subject to the $2,000 limit). The reduction to the mortgage interest deduction applies even if part of the Line 3 credit is carried forward to the next tax year.

25.15 Residential Energy Credits

On Form 5695 for 2017, you can claim the residential energy efficient property credit (REEP) if you made qualifying solar panel or solar water heating improvements to your home.

Several home energy credits expired at the end of 2016. The REEP expired at the end of 2016 for small wind energy property, geothermal heat pumps, and fuel cell property. In addition, the nonbusiness energy property credit, which in prior years covered energy-efficient insulation, storm windows, furnaces, heaters, boilers, and central air conditioners, also expired at the end of 2016. At the time this book was completed, it did not appear likely that Congress would retroactively restore these credits for property placed in service in 2017; an update, if any, will be in the e-Supplement at jklasser.com.

Residential energy efficient property (REEP). For 2017, a 30% credit is allowed on Form 5695 for the cost of qualified residential solar panels and solar water heating equipment that you installed in a home located in the United States.

Several components of the REEP that were allowed in prior years expired at the end of 2016.The REEP no longer applies to qualified wind turbines, geothermal heat pumps, and fuel cell property; any update concerning legislation to extend the credits for 2017 will be in the e-Supplement at jklasser.com.

For qualified solar panel and solar water heating equipment, the residence does not have to be your principal residence and the credit can apply to a home under construction. If you own a condominium or are a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your share of qualifying costs paid by the condominium management association or cooperative housing corporation. The credit includes the cost of labor for onsite preparation, assembly, and installation. There is no dollar limit on the 30% credit. However, no credit is allowed for costs allocable to heating a swimming pool or hot tub. Any subsidy that you (or your contractor on your behalf) received from a public utility for qualified costs reduces your costs on Form 5695 unless you included the subsidy in your gross income.

You may rely on a manufacturer’s written certification that a product meets the energy efficiency standards required for a credit. Keep the certification as part of your tax records. You do not have to attach the certification to Form 5695.

The overall credit on Form 5695 cannot exceed your tax liability, as reduced by various other tax credits; the Form 5695 instructions have a worksheet for figuring the liability limitation.

Note for years after 2019: Under current law, the 30% credit for solar panels and solar water heating property will apply through 2019. The credit percentage will drop to 26% for 2020 and to 22% for 2021, after which no credit will be allowed.

25.16 Credit for Qualified Plug-in Electric and Fuel Cell Vehicles

For 2017, you can claim a credit for a qualified plug-in electric vehicle with at least four wheels on Form 8936; see below.

Both the credit for qualified fuel cell vehicles, which had been allowed on Form 8910, and the credit for qualified two-wheeled plug-in electric vehicles (electric motorcycles), which had been claimed on Form 8936, expired for vehicles purchased after 2016. However, these credits may be claimed for 2017 if a qualifying vehicle was purchased in 2016 but not placed in service until 2017. When this book was completed, it appeared unlikely that Congress would extend these credits for post-2016 purchases; an update, if any, will be in the e-Supplement at jklasser.com.

Qualified plug-in electric-drive motor vehicle credit on Form 8936. The credit for 2017 applies to a qualifying four- (or more) wheel vehicle that you purchased new and which is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours. The vehicle must have a gross vehicle weight of less than 14,000 pounds to qualify for the credit. The minimum credit is $2,500, and depending on battery capacity the credit is increased, up to a maximum credit of $7,500. You may rely on the manufacturer’s certification that a vehicle qualifies for the credit and on the amount of the credit so certified, assuming the IRS does not withdraw the certification prior to your purchase.

You must be the original purchaser of a new qualifying vehicle to claim the credit. A credit is not allowed for a used vehicle. If you lease a qualifying vehicle, only the leasing company (and not you) may claim the credit. The vehicle must be manufactured primarily for use on public roads and you must use it primarily within the United States.

The personal use portion of the credit on Form 8936 is limited to tax liability (regular tax plus AMT) reduced by various nonrefundable personal credits. If the vehicle is used for business, the credit for business use figured on Form 8936 is entered on Form 3800 as part of the general business credit (40.26).

Credit phaseout based on manufacturer sales: The credit for a particular plug-in electric drive motor vehicle will begin to phase out starting in the second calendar quarter following the quarter in which the 200,000th qualifying vehicle is sold in the U.S. since the end of 2009. For that quarter and the next quarter, 50% of the full credit will be allowed, then 25% of the full credit will be allowed for two more quarters, after which no credits will be allowed.

25.17 Repayment of the First-Time Homebuyer Credit

For 2017 there is a repayment requirement only if a credit was claimed for a home purchased in 2008.The repayment requirement has expired for homes purchased in 2009-2011.

If you claimed the credit for a 2008 home purchase and you continued to own and use it as your principal residence for all of 2017, continue to repay at least 1/15th of the credit with your 2017 return, as you have been required to do starting with your 2010 return. Your repayment installment for 2017 should be entered on Line 60b of your Form 1040 as an additional tax. You do not have to attach Form 5405 to report the repayment.

However, if you sold your home or converted your entire residence to rental or business use during 2017, repayment of the rest of the 2008 credit is generally accelerated, meaning that the balance must be reported on Form 5405 and repaid with your 2017 return. But there are exceptions that limit or eliminate the accelerated repayment requirement. For example, if you sold the home in 2017 to an unrelated party at a loss, no repayment of the credit is required. If you sold the home in 2017 for a gain to an unrelated party and the gain is less than the credit balance (the 2008 credit minus repayments made for 2010 through 2016), the 2017 repayment is limited to the gain.

If in 2017 your home was destroyed, condemned, or sold to an unrelated person through condemnation or threat of condemnation and you had a loss on the disposition, you do not have to repay any of the credit, and if there was a gain, repayment over the rest of the 15-year period is limited to the gain on the disposition: for 2017, one-eighth of the total gain, as there are eight years left on the original 15-year repayment period; for 2018, one-seventh of the remainder, and so on. But if you do not acquire a new principal residence within two years of the 2017 home destruction, condemnation or condemnation-related sale, then, in 2019, you will have to repay all of the remaining gain. See the Form 5405 instructions for details on the exceptions to the accelerated repayment rule.

If you were repaying the 2008 credit, got divorced, and ownership of the home was transferred to your spouse as part of the divorce settlement, your spouse becomes responsible for repaying 1/15 of the credit while he or she continues to use it as a principal residence, or if he or she stops using it as a principal residence, accelerated repayment could be required under the regular rules.