Miscellaneous Tax Credits: What They Are, How They Work

What Are Miscellaneous Tax Credits?

Miscellaneous tax credits are a group of less common tax credits that apply to taxpayers in various situations. In general, a tax credit is an amount of money that people are permitted to subtract, dollar for dollar, from the income taxes that they owe.

As with all other tax credits, miscellaneous tax credits are designed to reward and promote certain types of economic activities—such as the purchase of hybrid automobiles—or to reward those who have taken measures to make their homes more energy-efficient.

For example, all-electric (EV) vehicles and plug-in hybrid cars purchased new in or after 2010 may be eligible for a federal income tax credit of as much as $7,500. The specific credit amount that a taxpayer is eligible for varies based on the capacity of the battery used to power the vehicle. Some states and cities also provide tax incentives for qualified vehicles. Neighborhood electric vehicles (NEVs) do not qualify for this credit. (NEVs are a U.S. category for battery electric vehicles that are usually built to have a top speed of 25 miles per hour and have a maximum loaded weight of 3,000 lb.)

In addition, The American Recovery and Reinvestment Act (ARRA) of 2009 created certain tax incentives for homeowners who take measures to make their homes more energy-efficient. Improvements, such as installing energy-efficient exterior windows, doors, and skylights, and energy-efficient heating and air conditioning systems, may qualify for an energy tax credit of up to 30% of the cost of all qualifying improvements.

Miscellaneous tax credits are subject to change as the tax code changes and different sets of behaviors are rewarded or discouraged.

Understanding Miscellaneous Tax Credits

Miscellaneous tax credits refer to a category of tax credits offered to taxpayers who perform certain actions to qualify for them. The IRS divides these credits for individuals into five different categories: family and dependent credits, income and savings credits, homeowner credits, healthcare credits, and education credits.

Some popular miscellaneous tax credits available include the Mortgage Interest Credit—for first-time homebuyers with incomes under a certain amount—the Prior-Year Alternative Minimum Tax Credit—for taxpayers who paid the Alternative Minimum Tax (AMT) in a previous year, the Foreign Tax Credit—for taxpayers who have paid tax to a foreign country for a variety of reasons—and the Qualified Electric Vehicle Credit—for taxpayers who purchase an electric or alternative fuel vehicle.

Most miscellaneous tax credits are non-refundable, which means that they can reduce the amount the taxpayer is required to pay to the Internal Revenue Service (IRS) in taxes, but if the miscellaneous tax credits reduce the tax burden so much that they give the taxpayer a credit, this amount cannot be refunded to the taxpayer.

The exceptions to this rule are the credit for excess Social Security taxes that have been withheld from the taxpayer’s paychecks, because this is actual money that the taxpayer should have received, and the credit for railroad retirement benefits that have been withheld because these benefits are not supposed to be taxed so the taxpayer should have received the full amount of these benefits.

Miscellaneous Tax Credits vs. Miscellaneous Tax Deductions

Miscellaneous tax credits are applied after the taxpayer’s income and tax liability are calculated, and they subtract the amount of the credit directly from the amount of tax the taxpayer owes. In contrast, miscellaneous tax deductions are subtracted from the taxpayer’s income and affect the total taxable income, which is used to calculate the tax liability of the taxpayer.

Tax credits are commonly referred to as after-tax, while tax deductions are referred to as before-tax. Miscellaneous tax credits can be taken as long as the taxpayer qualifies for the credit. Miscellaneous tax deductions can only be taken if the total deductions are greater than 2% of the taxpayer’s gross income.