Tax Credits

There are a variety of tax credits available to individuals in the U.S. tax system. The most popular are:

• The foreign tax credit
• Child related (child and dependent care expenses, child tax credit, adoption expenses)
• Education Credits (Lifetime Learning Credit, Hope Credit)
• Credit for the elderly or disabled

Foreign Tax Credit (FTC)

The foreign tax credit is designed to alleviate the double taxation of the same income by the U.S. and foreign country. Generally, this is a dollar for dollar credit, but it does have limitations. For most people, this relates to taxes paid on foreign dividends. A more detailed discussion of the FTC takes place in Section II of our books on U.S Expatriates and Foreign Nationals.

Child Tax Credit and Additional Child Tax Credit

You may be entitled to a credit for each qualifying child. To qualify for the credit:

• the child must be under 17
• a citizen or resident of the U.S.
• someone you claim as a dependent
• your child, stepchild, grandchild or eligible foster child

Phase-Out

A phase-out of the Child Tax Credit begins when you pass an AGI threshold. For every $1,000 or part thereof that your AGI exceeds this threshold, you must reduce your credit by $50.

• $75,000 - Single, Qualifying Widow(er)
• $110,000 - Married filing jointly
• $55,000 - Married filing separately
• $75,000 - Head of household

Higher Education Tax Credits There are two credits (Hope and LLC) for higher education expenses. Qualified expenses include tuition and other expenses required for enrollment at an eligible institution. Expenses that do not qualify are books, room and board, and activity fees.

Hope
The Hope credit is for full time students enrolled in their first or second year of post secondary education. The Hope credit is calculated as 100% of the first $1,000 of qualified expenses plus 50% of the next $1,000 of qualified expenses, for a maximum of $1,500 per year per student.

Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is not limited to first or second year students of post secondary education. Qualified expenses for the LLC include the cost of instruction taken at a qualified educational institution or to acquire or improve existing job skills. The amount of the credit is 20% of the first $10,000 of qualified expenses for a maximum of $2,000 per year.

Please note that there is a phase-out based on your modified adjusted gross income. For a deeper understanding of the phase-outs on these credits, please consult a tax advisor.

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