Refundable Credits(p255)

The credits discussed in this part of the chapter are treated as payments of tax. If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, the excess can be refunded to you.

You must include in your income any amounts that regulated investment companies (commonly called mutual funds) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even if you did not actually receive them. If the mutual fund or REIT paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. The mutual fund or REIT will send you Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, showing your share of the undistributed capital gains and the tax paid, if any. Take the credit for the tax paid by entering the amount on Form 1040, line 68, and checking box a. Attach Copy B of Form 2439 to your return. See Capital Gain Distributions in chapter 8 for more information on undistributed capital gains.

The first-time homebuyer credit operates much like an interest-free loan. You generally must repay it over a 15-year period. See Recapture of credit later.

In general, you can claim the credit if you are a first-time homebuyer. You are considered a first-time homebuyer if:

• You bought your main home in the United States after April 8, 2008, and before July 1, 2009, and
• You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.

If you constructed your main home, you are treated as having bought it on the date you first occupied it.

Your main home is the one you live in most of the time. It can be a house, houseboat, condominium, or other type of residence.

You cannot claim the credit if any of the following apply.

1. Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filing jointly). See Modified adjusted gross income (MAGI) later.
2. You are eligible to claim the District of Colombia first-time homebuyer credit for 2008 or any prior year.
3. Your home financing comes from tax-exempt mortgage revenue bonds.
4. You are a nonresident alien.
5. Your home is located outside the United States.
6. You sell the home, or it ceases to be your main home, before the end of 2008.
7. You acquired your home by gift or inheritance.
8. You acquired your home from a related person.

A related person includes:

• Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).
• A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.
• A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

For more information about related persons, see Nondeductible Loss in chapter 2 of Publication 544, Sales and Other Dispositions of Assets.

Generally, the credit is the smaller of:

• $7,500 ($3,750 if married filing separately), or
• 10% of the purchase price of the home.

You are allowed the full amount of the credit if your modified adjusted gross income (MAGI) is $75,000 or less ($150,000 or less if married filing jointly). The credit is reduced if MAGI is more than $75,000 ($150,000 if married filing jointly). The credit is eliminated completely if MAGI is $95,000 ($170,000 if married filing jointly) or more.

Your MAGI is the amount from Form 1040, line 38, increased by the total of any:

• Exclusion of income from Puerto Rico, and
• Amount from Form 2555, line 45 and line 50; Form 2555-EZ, line 18; and Form 4563, line 15.

You generally must repay (recapture) the credit over a 15-year period in 15 equal installments. The recapture period begins 2 years after the year in which you claimed the credit. Thus, if you claim the credit on your 2008 tax return, the recapture period begins in 2010 and you must include the first installment as additional tax on your 2010 tax return.

If your home ceases to be your main home before the 15-year period is up, you must include all remaining annual installments as additional tax on the return for the tax year that happens. This includes situations where you sell the home or convert it to business or rental property.

For purposes of repaying the credit, each spouse filing a joint return is treated as having been allowed half the credit.

You claimed a $7,500 credit on your 2008 tax return. You must include $500 ($7,500 ÷ 15) as additional tax on your 2010 tax return and on each tax return for the next 14 years.

You claimed a $7,500 credit on your 2008 tax return. In 2009, you sold the home to your son. You must include $7,500 as additional tax on your 2009 tax return.

The following are exceptions to the recapture rule.

• If you sell the home to someone who is not related to you, the recapture in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of the credit you have not recaptured.
• If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within 2 years of the event, you continue to recapture the credit over the rest of the 15-year recapture period.
• If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for recapturing the remaining credit.
• If you die, the rest of the credit does not have to be recaptured.

To take the credit, complete Form 5405 and attach it to your Form 1040. Include your credit on Form 1040, line 69.

You may be able to take this credit for any month in which all the following statements were true on the first day of the month.

• You were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient (defined later).
• You were covered by a qualified health insurance plan for which you paid the premiums, or your portion of the premiums, directly to your health plan.
• You were not entitled to Medicare Part A or enrolled in Medicare Part B.
• You were not enrolled in Medicaid or the State Children's Health Insurance Program (SCHIP).
• You were not enrolled in the Federal Employees Health Benefits program (FEHBP) or eligible to receive benefits under the U.S. military health system (CHAMPUS/TRICARE).
• You were not covered by, or eligible for coverage under, any employer-sponsored health insurance plan (including any employer-sponsored health insurance plan of your spouse).
• You were not imprisoned under federal, state, or local authority.

But, you cannot take the credit if you can be claimed as a dependent on someone else's 2008 tax return. If you meet all of these conditions, you may be able to take a credit of up to 65% of the amount you paid for qualified health insurance coverage for you and any qualifying family members. You cannot take the credit for insurance premiums on coverage that was partially paid for with a National Emergency Grant. The amount you paid for qualified health insurance coverage must be reduced by any Archer MSA and health savings account distributions used to pay for the coverage.

You can take this credit on your tax return or have it paid on your behalf in advance to your insurance company. If the credit is paid on your behalf in advance, that amount will reduce the amount of the credit you can take on your tax return.

For definitions and special rules, including those relating to qualified health insurance plans, qualifying family members, and employer-sponsored health insurance plans, see Publication 502 and the instructions for Form 8885.

You were an eligible TAA recipient on the first day of the month if, for any day in that month or the prior month, you:

• Received a trade readjustment allowance, or
• Would have been entitled to receive such an allowance except that you had not exhausted all rights to any unemployment insurance (except additional compensation that is funded by a state and is not reimbursed from any federal funds) to which you were entitled (or would be entitled if you applied).

You received a trade adjustment allowance for January 2008. You were an eligible TAA recipient on the first day of January and February.

You were an eligible alternative TAA recipient on the first day of the month if, for that month or the prior month, you received benefits under an alternative trade adjustment assistance program for older workers established by the Department of Labor.

You received benefits under an alternative trade adjustment assistance program for older workers for October 2008. The program was established by the Department of Labor. You were an eligible alternative TAA recipient on the first day of October and November.

You were an eligible PBGC pension recipient on the first day of the month, if both of the following apply.

1. You were age 55 or older on the first day of the month.
2. You received a benefit for that month that was paid by the PBGC under title IV of the Employee Retirement Income Security Act of 1974 (ERISA).

If you received a lump-sum payment from the PBGC after August 5, 2002, you meet item (2) above for any month that you would have received a PBGC benefit if you had not received the lump-sum payment.

To take the credit, complete Form 8885 and attach it to your Form 1040. Include your credit in the total for Form 1040, line 68, and check box d.

You must attach invoices and proof of payment for any amounts you include on Form 8885, line 2. For details, see Publication 502 or Form 8885.

This credit is figured like the economic stimulus payment you may have received in 2008 except that your 2008 tax information is used to figure this credit. Your 2007 tax information was used to figure your economic stimulus payment.

You may be able to take this credit only if:

• You did not get an economic stimulus payment, or
• Your economic stimulus payment was less than $600 ($1,200 if married filing jointly for 2007) plus $300 for each qualifying child you had for 2008.

However, you do not qualify for this credit if all of the following apply.

• You received an economic stimulus payment of $300 ($600 if married filing jointly for 2007) before any offset (see Offset against debts in chapter 1),
• Your 2008 tax on Form 1040, line 46 (Form 1040A, line 28, or Form 1040EZ, line 11), is $300 or less ($600 or less if married filing jointly for 2008),
• Your 2008 filing status is the same as your 2007 filing status, and
• You do not have any qualifying children.

Generally, the credit cannot be more than your 2008 net income tax liability (your regular tax liability plus any alternative minimum tax (AMT), minus any nonrefundable credits you claimed other than the child tax credit). However, your credit will be at least $300 ($600 if married filing jointly) if you meet either of the following two conditions:

• The total of your earned income, social security benefits (including social security disability payments), tier 1 railroad retirement benefits, certain veterans benefits, and nontaxable combat pay is at least $3,000, or
• Your total income is more than $8,950 if your filing status is single or married filing separately ($11,500 if head of household; $14,400 if qualifying widow(er); $17,900 if married filing jointly), and your net income tax liability is more than zero.

If you meet either of these conditions, you can also get an additional $300 for each of your children who is a qualifying child for the child tax credit.

To be eligible, you and your spouse each must have a valid social security number. To get the additional $300 credit for a child, the child must have a valid social security number. However, a valid social security number is not required for you, your spouse, or any qualifying child if you file a joint return and either you or your spouse was a member of the U. S. Armed Forces at any time in 2008. You are not eligible for the credit if you can be claimed as a dependent of another taxpayer, or if you file Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

If your adjusted gross income (AGI) is more than $75,000 ($150,000 if married filing jointly), your credit will be reduced by 5% of your AGI in excess of that amount.

Your credit is reduced by any economic stimulus payment you received in 2008. However, if your credit is less than the stimulus payment you received, you do not have to repay the difference.

To take the credit, complete the Recovery Rebate Credit Worksheet–Line 70 in the Form 1040 instructions (Recovery Rebate Credit Worksheet–Line 42 in the Form 1040A instructions or Recovery Rebate Credit Worksheet–Line 9 in the Form 1040-EZ instructions). Include your credit on Form 1040, line 70 (Form 1040A, line 42, or Form 1040-EZ, line 9).

If you paid the alternative minimum tax for 2007 or you had a minimum tax credit carryforward to 2008, you may be able to take a credit for prior year minimum tax. For information about the nonrefundable credit for prior year minimum tax you may be able to take, see Nonrefundable Credit for Prior Year Minimum Tax, earlier. However, for 2008, you may qualify for a refundable credit for prior year minimum tax if you have any unused minimum tax credit carryforward from 2005 or earlier years, even if the total amount of your current year credit is more than your total tax liability. To figure the amount of any 2008 refundable credit, complete Part IV of Form 8801. Include any refundable credit on Form 1040, line 68, and check box c. You can carry forward any unused credit for prior year minimum tax to later years.

Most employers must withhold social security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.

If you worked for two or more employers in 2008, you may have had too much social security or tier 1 RRTA tax withheld from your pay. You can claim the excess social security or tier 1 RRTA tax as a credit against your income tax. The following table shows the maximum amount of wages subject to tax and the maximum amount of tax that should have been withheld for 2008.

Type of tax	Maximum wages subject to tax	Maximum tax that should have been withheld
Social security or RRTA tier 1	$102,000	$6,324.00
RRTA tier 2	$75,900	$2,960.10

If any one employer withheld too much social security or tier 1 RRTA tax, you cannot take the excess as a credit against your income tax. The employer should adjust the tax for you. If the employer does not adjust the overcollection, you can file a claim for refund using Form 843.

If you are filing a joint return, you cannot add the social security or tier 1 RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Figure the withholding separately for you and your spouse to determine if either of you has excess withholding.

If you did not work for a railroad during 2008, figure the credit as follows:

1.	Add all social security tax withheld (but not more than $6,324.00 for each employer). Enter the total here
2.	Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 61
3.	Add lines 1 and 2. If $6,324.00 or less, stop here. You cannot take the credit
4.	Social security tax limit	6,324.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 65 (or Form 1040A, line 43)

You are married and file a joint return with your spouse who had no gross income in 2008. During 2008, you worked for the Brown Shoe Company and earned $60,000 in wages. Social security tax of $3,720 was withheld. You also worked for another employer in 2008 and earned $51,000 in wages. $3,162 of social security tax was withheld from these wages. Because you worked for more than one employer and your total wages were more than $102,000, you can take a credit of $558.00 for the excess social security tax withheld.

1.	Add all social security tax withheld (but not more than $6,324.00 for each employer). Enter the total here	$6,882.00
2.	Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 61	-0-
3.	Add lines 1 and 2. If $6,324.00 or less, stop here. You cannot take the credit	6,882.00
4.	Social security tax limit	6,324.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 65 (or Form 1040A, line 43)	$558.00

If you were a railroad employee at any time during 2008, figure the credit as follows:

1.	Add all social security and tier 1 RRTA tax withheld (but not more than $6,324.00 for each employer). Enter the total here
2.	Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 61
3.	Add lines 1 and 2. If $6,324.00 or less, stop here. You cannot take the credit
4.	Social security and tier 1 RRTA tax limit	6,324.00
5.	Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 65 (or Form 1040A, line 43)

Enter the credit on Form 1040, line 65, or include it in the total for Form 1040A, line 43.