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Chapter 36. Other Credits Excess withholding of social security tax, railroad retirement tax tier 1, and Medicare tax. Social security and railroad retirement tax (RRTA) are both withheld at a rate of 6.2% on the first $55,500 of wages in 1992. Medicare tax is withheld at a rate of 1.45% on the first $130,200 of wages. If you have two or more employers and they withheld too much social security, RRTA, or Medicare tax during 1992, you may be entitled to a credit of the excess withholding. For more information about the credit and how to get it, see Credit for Excess Social Security Tax, Medicare Tax, or Railroad Retirement Tax Withheld in this chapter. Introduction In addition to the child and dependent care credit (Chapter 33), the credit for the elderly or the disabled (Chapter 34), and the earned income credit (Chapter 35) you may be able to claim other tax credits. This chapter is divided into two parts and discusses six credits in the following order. ∙ Part 1, Nonrefundable Credits: Credit for prior year minimum tax, Mortgage interest credit, and Foreign tax credit. ∙ Part 2, Refundable Credits: Credit for excess social security tax, Medicare tax, or railroad retirement tax withheld, Credit from a regulated investment company, and Credit on diesel-powered highway vehicles. Nonrefundable Credits. The first part of the chapter, Nonrefundable Credits, covers three credits that you subtract directly from your tax. These credits may reduce your tax to zero. If these credits are more than your tax, the excess is not refunded to you. Refundable Credits. The second part of this chapter, Refundable Credits, covers three credits that are refundable to you and treated as payments. These three credits are added to the federal income tax withheld from your salary and wages and added to any estimated tax payments you made. If these credits are more than your total tax, the excess will be refunded to you. Related publications and forms. This chapter refers to several publications and forms that you may need. The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more information, you may want to order the publication or form listed under each credit: ∙ Credit for Prior Year Minimum Tax Publication 909, Alternative Minimum Tax for Individuals, and Form 8801, Credit for Prior Year Minimum Tax - Individuals and Fiduciaries. ∙ Mortgage Interest Credit Publication 936, Home Mortgage Interest Deduction, Form 8396, Mortgage Interest Credit, and Form 8828, Recapture of Federal Mortgage Subsidy. ∙ Foreign Tax Credit Publication 514, Foreign Tax Credit for Individuals, and Form 1116, Foreign Tax Credit. ∙ Credit for Excess Social Security, Medicare Tax, or Railroad Retirement Tax Withheld Publication 505, Tax Withholding and Estimated Tax, and Form 1040 Instructions. ∙ Credit from a Regulated Investment Company Publication 564, Mutual Fund Distributions, Form 2439, Notice to Shareholder of Undistributed Long-term Capital Gains. ∙ Credit on Diesel-Powered Highway Vehicles Publication 378, Fuel Tax Credits and Refunds, and Form 4136, Credit for Federal Tax on Fuels. Nonrefundable Credits The following credits are discussed in this part: ∙ Credit for prior year minimum tax ∙ Mortgage interest credit, and ∙ Foreign tax credit. Credit for Prior Year Minimum Tax You may be able to take a credit against your regular tax if you: ∙ Paid alternative minimum tax in 1991, ∙ Had a minimum tax credit carryforward from 1991 to 1992, or ∙ Had an unallowed nonconventional-source fuel credit or an unallowed orphan drug credit in 1991. Credit amount. The credit is generally the amount of alternative minimum tax you actually paid in 1991 reduced by the part of it generated by exclusion items. Add to this any credit carried forward and any unallowed nonconventional-source fuel credit and orphan drug credit. Exclusion items. The adjustments and preference items that result in the permanent exclusion of income for regular tax purposes are exclusion items. These exclusion items are: ∙ The standard deduction, ∙ Personal exemptions, ∙ Medical and dental expenses, ∙ Miscellaneous itemized deductions, ∙ Taxes, ∙ Interest expense, ∙ Appreciated property charitable deduction, ∙ Tax-exempt interest from specified private activity bonds, and ∙ Depletion. Figuring the credit. Use Form 8801 to figure your 1992 credit and any carryforward to 1993. You can carry forward any unused credit to later years until it is completely used. For additional information about the credit and an illustrated example, get Publication 909. How to claim the credit. Figure the credit and any carryforward to the next year on Form 8801, and attach it to your Form 1040. Include the credit in your total for line 44, Form 1040, and check box c. You can carry forward any unused credit for prior year minimum tax to later years until it is completely used. For additional information about the credit and an illustrated example, get Publication 909, Alternative Minimum Tax for Individuals. Mortgage Interest Credit Mortgage credit certificates issued by state and local governments may entitle a certificate holder to a mortgage interest credit. The certificate must be used in connection with the purchase, qualified rehabilitation, or qualified home improvement of the certificate holder's main home. Who qualifies. You may be able to claim a mortgage interest credit if you were issued a qualified mortgage credit certificate (MCC) under a qualified MCC program. The MCC must relate to your main home. Amount of credit. You figure the credit by multiplying the certificate credit rate by the interest you paid during the year on the covered loan amount (mortgage). The certificate credit rate and the covered loan amount are shown on the MCC. Limit. If the certificate credit rate is more than 20%, the credit cannot be more than $2,000. Dividing the interest. If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided in proportion to the interest held by each person. Example. John and his brother, George, were issued a qualified MCC. They used the certificate to obtain a mortgage on a home that is their main home. John has a 60% interest and George has a 40% interest. In 1992 John paid $5,400 mortgage interest and George paid $3,600. The MCC shows a credit rate of 25%. The covered loan amount (mortgage) is $60,000. Because the credit rate is more than 20%, the credit is limited to $2,000. John's credit is limited to $1,200 ($2,000 * 60%). He figures the credit by multiplying the interest he paid in 1992 ($5,400) by the certificate credit rate (25%) for a total of $1,350. However, his credit is limited to the $1,200 above. George's credit is limited to $800 ($2,000 * 40%). He figures the credit by multiplying the interest he paid in 1992 ($3,600) by the certificate credit rate (25%) for a total of $900. His credit is limited to the $800 above. Since the entire $2,000 credit was used, the excess ($150 for John and $100 for George) cannot be carried forward to 1993, regardless of the tax liabilities for John and George. See Carryforward, next. Carryforward. If your allowable credit is more than your tax liability reduced by certain credits, you can carry forward the unused portion of the credit to your next 3 tax years or until used, whichever comes first. If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, no amount over the $2,000 (or your prorated share of the $2,000 if you must allocate the credit) may be carried forward. Reduced home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), reduce your home mortgage interest deduction by the amount of mortgage interest credit figured before you add in any credit carryforwards from previous years. For more information about the home mortgage interest deduction, see Chapter 24. How to claim the credit. Figure the credit and any carryforward to next year on Form 8396, and attach it to your Form 1040. Be sure to include any carryforward from 1989, 1990, and 1991. You cannot use a carryforward from 1989 on your tax return for any year after 1992. Include the credit in your total for line 44 (Form 1040), and check box b. Recapture of Federal Mortgage Subsidy. If you closed on a mortgage from a qualified mortgage bond program and received a mortgage credit certificate after December 31, 1990, you may be subject to a new recapture rule. The recapture would generally occur if you sold or disposed of your home during the first 9 years following the date of closing. See Publication 523, Tax Information on Selling Your Home, for more information. Foreign Tax Credit You generally can choose to claim income taxes you paid or accrued during the year to a foreign country or U.S. possession as a credit against your U.S. income tax. Or, you can deduct them as an itemized deduction. To take the foreign tax credit, complete Form 1116 and attach it to your Form 1040. Enter the credit on line 43, Form 1040. For more information, get Publication 514. Refundable Credits The following credits are refundable and are treated as payments of tax: ∙ Credit for excess social security tax, Medicare tax, or railroad retirement tax withheld, ∙ Credit from a regulated investment company, and ∙ Credit on diesel-powered highway vehicles. Credit for Excess Social Security Tax, Medicare Tax, or Railroad Retirement Tax Withheld If you worked for two or more employers in 1992, and together they paid you wages that exceed certain limits, you may be entitled to a credit of the excess amounts of tax withheld on those wages. This is a credit against your income tax. The wage and tax withholding limits are: ∙ $55,500 in wages subject to social security and tier 1 RRTA withholding tax of not more than $3,441.00, ∙ $130,200 in wages subject to Medicare withholding tax of not more than $1,887.90 (this applies to both social security and tier 1 RRTA wages), or One employer. If you had only one employer, and that employer withheld social security, Medicare, or RRTA tax that exceeds the wage and withholding limits in the preceding list, you cannot claim the extra amount withheld as a credit against your income tax. Your employer must adjust this for you. Joint return. If you are filing a joint return, you cannot add the social security, Medicare, or RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Figure the credit separately. Where to report the credit. If you file Form 1040, enter the credit on line 58. If you file Form 1040A or Form 1040EZ, include the credit in the total on line 28d of Form 1040A or on line 6 of Form 1040EZ. Write "Excess SST" and show the amount of the credit in the space to the left of the line. Note. If taxable income is $50,000 or more, then you must file Form 1040. If taxable income is less than $50,000, then you may file either Form 1040A or Form 1040EZ. How to figure the credit if you did not work for a railroad. If you did not work for a railroad during 1992, figure the credit as follows: 1. Add all social security tax withheld (but not more than $3,441.00 for each employer) ............................. __________ 2. Enter any uncollected social security tax on tips or group-term life insurance shown on any 1992 Form(s) W─2 ................................ __________ 3. Add lines 1 and 2 .......................... __________ 4. Social security tax limit .................. 3,441.00 __________ 5. Subtract line 4 from line 3. (If less than zero, enter zero) ..................... __________ 6. Add all Medicare tax withheld (but not more than $1,887.90 for each employer) .................................. __________ 7. Enter any uncollected Medicare tax on tips or group-term life insurance shown on any 1992 Form(s) W─2 .............. __________ 8. Add lines 6 and 7 .......................... __________ 9. Medicare tax limit ......................... 1,887.90 __________ 10. Subtract line 9 from line 8 (If less than zero, enter zero) .................... __________ 11. Credit. Add lines 5 and 10. Enter the result here and on Form 1040, line 58 (or Form 1040A, line 28d or Form 1040EZ, line 6) ........................... ========== Example. You are married and file a joint return with your spouse who had no gross income in 1992. During 1992 you worked for the Brown Shoe Company and earned $35,000 in wages. Social security tax of $2,170 and Medicare tax of $507.50 was withheld. You also worked for another employer in 1992 and earned $25,000 in wages. $1,550 of social security tax and $362.50 of Medicare tax was withheld from these wages. Because you worked for more than one employer and your total wages were more than $55,500, you can claim a credit of $279.00 for the excess social security tax withheld. There is no tax credit for the Medicare tax withheld since your total wages did not exceed $130,200. A filled- in worksheet follows. 1. Add all social security tax withheld (but not more than $3,441.00 for each employer) ............................. $3,720.00 __________ 2. Enter any uncollected social security tax on tips or group-term life insurance shown on any 1992 Form(s) W─2 ................................ -0- __________ 3. Add lines 1 and 2 .......................... 3,720.00 __________ 4. Social security tax limit .................. 3,441.00 __________ 5. Subtract line 4 from line 3. (If less than zero, enter zero) ..................... 279.00 __________ 6. Add all Medicare tax withheld (but not more than $1,887.90 for each employer) .................................. 870.00 __________ 7. Enter any uncollected Medicare tax on tips or group-term life insurance shown on any 1992 Form(s) W─2 .............. -0- __________ 8. Add lines 6 and 7 .......................... 870.00 __________ 9. Medicare tax limit ......................... 1,887.90 __________ 10. Subtract line 9 from line 8 (If less than zero, enter zero) .................... -0- __________ 11. Credit. Add lines 5 and 10. Enter the result here and on Form 1040, line 58 (or Form 1040A, line 28d or Form 1040EZ, line 6) .......................... 279.00 ========== Enter the $279.00 as a credit against your income tax on line 58 (Form 1040), line 28d (Form 1040A), or line 6 (Form 1040EZ). Credit from a Regulated Investment Company You must include in your income any amounts that an investment company allocated to you as capital gain distributions, even if you did not actually receive them. If the investment company paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. The company will send you Form 2439 telling you the undistributed capital gains amount and the tax paid, if any. You claim the credit by entering the amount on line 59, Form 1040, and checking Box a. Also attach Copy B of Form 2439 to your return. See Capital Gain Distributions in Chapter 9 for more information on undistributed capital gains. Credit on Diesel-Powered Highway Vehicles If you purchased a diesel-powered highway vehicle, you may be entitled to a one-time credit if: ∙ You are the first owner of the vehicle, and ∙ You do not intend to resell the vehicle. Amount of credit. The credit is $102 if you purchased a diesel-powered automobile or $198 if you purchased a diesel-powered light van or truck. How to claim the credit or refund. To claim the credit or refund, complete line 1 of Form 4136 and attach it to Form 1040. Enter the credit on line 59, Form 1040, and check Box b. For more information, see the discussion of Diesel-Powered Cars, Vans, and Light Trucks in Publication 378.