Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons including to stimulate employment, and to stimulate certain investments, among other things.
Adoption Credit
If you are an adoptive parent or are planning to adopt a child, you may qualify for the adoption credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care.
This is a 1:1 credit for each dollar of qualified expenses up to the maximum for the year, which is $14,440 for 2021. The credit is non-refundable, which means it can only reduce your tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be carried forward for up to five years to reduce your future tax liability.
Qualified expenses generally include adoption fees, court costs, attorney fees, and travel expenses that are reasonable, necessary and directly related to the child’s adoption, and they may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed, whether or not any qualified expenses were incurred.
The credit is phased out for higher-income taxpayers. For 2021, the AGI (computed without foreign-income exclusions) phase-out threshold is $216,660, and the credit is completely phased out at the AGI of $256,660. Unlike most phase-outs, this one is the same regardless of filing status. However, taxpayers filing as married filing separately cannot claim the credit.
Residential Energy Efficient Property (Solar) Credit
This tax credit was created to reward individuals for investing in equipment that uses alternative energy sources to create electrical power for use in a taxpayer’s home or second home. It includes alternative power sources such as fuel cells, wind energy, and geothermal heat pumps, for which the credit expires after 2021.
However, the credit is most commonly associated with the home solar credit, which is equal to 26% of the cost of the solar electric system for an individual’s primary and second homes, with no limit on the cost of the solar system. Even though the credit is non-refundable, any amount not used in the first year carries over to subsequent credit years.
The credit percentage is phased-out as shown in the table.
| Home Energy Credit Percentage | |||
| Year | 2020 Through 2022 | 2023 | 2024 and After |
| Percentage | 26 | 22 | None |
Before deciding to add a solar electric system to your home, you need to consider if you can actually afford the system and whether it is worth having one, after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit. The credit is not refundable and it can be carried over through 2023.
Vehicle Tax Credits
If you are considering purchasing a new car or light truck (less than 14,000 pounds), don’t overlook the fact that Congress allows a substantial tax credit for the purchase of the many electric vehicles currently being offered for sale, providing a tax credit worth as much as $7,500.
To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the vehicle’s original use must commence with you, and you must use the vehicle predominantly in the United States.
Congress did include a phase-out provision for this credit that applies by vehicle manufacturer. The credit begins to phase out once the manufacturer sells 200,000 electric vehicles. To see if the make and model you are considering qualify, visit the IRS website.
The credit is available whether you use the vehicle for business, personally, or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years. The personal portion is non-refundable.
Electric Motorcycle Credit
Taxpayers that purchase a qualifying electric 2-wheel motorcycle will qualify for a non-refundable credit equal to 10% of the cost, maximum credit $2,500 per vehicle. A qualifying vehicle must meet the following requirements:
- Propelled by a rechargeable battery with a capacity of at least 2.5 kilowatt hours,
- Capable of being re-charged from an external source,
- Highway vehicle capable of 45 mph or more,
- Manufactured primarily for use on public streets, roads and highways,
- Gross weight is less than 14,000 pounds,
- Original use (lease or purchase) begins with the taxpayer, acquired after 2014 and before 2022.
