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Atax credit is atax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe thestate.[1] 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.
A refundable tax credit is one which, if the credit exceeds the taxes due, the government pays back to the taxpayer the difference.[2] In other words, it makes possible a negative tax liability.[3] 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 wouldnot refund the taxpayer the $200 difference.
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 arepayroll withholding of income tax orPAYE,withholding of tax at source on payments to nonresidents, and input credits forvalue added tax.
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.
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.
In the United Kingdom, "Tax Credits" are a form of means-tested support payment. They bear no connection to the amount of tax paid by the recipient and can be paid to those who pay no tax at all.[4] TheChild Tax Credit andWorking Tax Credit were paid directly into the claimant's bank account orPost Office Card Account. In exceptional circumstances, these can be paid by cashcheque (sometimes calledgiro). However, payments may stop if account details are not provided.[5] 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 receivingDisability Living Allowance and the education status of any children over sixteen years of age. Since 2018, Child Tax Credit has been replaced byUniversal Credit for most people.
Working Tax Credit 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.[6] It is being replaced byUniversal 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.[7] According to Gavin Kelly of theResolution Foundation, tax credits help raiseliving standards of low paid workers. He wrote in theNew Statesman, "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."[8]
On 15 September 2015, the House of Commons voted[9] to decrease Tax Credit thresholds, a law that came into effect on 6 April 2016.[10][dubious –discuss] Opponents claimed that it would harm those on low incomes. Simon Hopkins, Chief Executive of charityTurn2us 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."[11]
TheIFS 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 theNational Living Wage.[12] 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.[9]
On 26 October 2015 the House of Lords supported a motion fromBaroness Meacher delaying the imposition of the cuts until a new consideration of the effects could be made by the House of Commons.[13]
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The U.S. system grants the following low income tax credits:
There are several different types of income tax credits offered in Canada:
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 atax deduction for each dependent child):
Some systems indirectly subsidize education and similar expenses through tax credits.
The U.S. system has the following nonrefundable 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.
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):
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.
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.
The legislative incentive program to encourage the preservation of "historical buildings". Congress instituted a two-tier Tax Credit incentive under theTax Reform Act of 1986. 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.[30]
The investment tax credit is allowed section 48 of the Internal Revenue Code. This investment tax credit varies depending on the type ofrenewable energy project; solar, fuel cells ($1500/0.5 kW) andsmall 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.[31]
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.[32] Installations will be considered eligible for the ITC based on the date that construction starts.[33]
Section 45 of the Internal Revenue Code allows an income tax credit of 2.3 cents/kilowatt-hour (as adjusted for inflation for 2013[34]) 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),[35] was created under theEnergy Policy Act of 1992 (at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation).[36] In late 2015 a large majority inCongress voted[37] to extend the PTC forwind andsolar power for 5 years and $25 billion. Analysts expect $35 billion of investment for each type.[38]
Under thisprogram, 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.
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.
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.[39] It can be used to offset income or payroll taxes, depending on the situation.[40]
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.
The WOTC was established by theSmall Business Job Protection Act of 1996. The WOTC replaced the Targeted Jobs Tax Credit (TJTC), which was created by theRevenue Act of 1978 and was in place from 1978 to 1994. In December 2014, the WOTC was extended retroactively to the beginning of 2014 by the Tax Increase Prevention Act of 2014 (TIPA), P.L. 113–295.[41] That act authorized the credit only through December 31, 2014.[42] Later, through the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), Congress modified and extended the WOTC through December 31, 2019.[43]
The American Opportunity Tax Credit (AOTC)[44] 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.[45]
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.
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.[46] 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.[47]
Resellers or producers of goods or providers of services (collectively, providers) must collectvalue added tax (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.
Income tax systems that impose tax on residents on their worldwide income tend to grant aforeign tax credit 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/ortax treaty. The credit is generally granted to individuals and entities, and is generally nonrefundable.
Several tax systems impose a regular income tax and, where higher, an alternative tax. The U.S. imposes analternative 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.
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