Income Tax in The United States - Credits

Credits

The federal and state systems offer numerous tax credits for individuals and businesses. Among the key federal credits for individuals are:

• Child credit: a credit up to $1,000 per qualifying child.
• Child and dependent care credit: a credit up to $6,000, phased out at incomes above $15,000.
• Earned Income Tax Credit: this refundable credit is granted for a percentage of income earned by a low income individual. The credit is calculated and capped based on the number of qualifying children, if any. This credit is indexed for inflation and phased out for incomes above a certain amount. For 2009, the maximum credit was $5,657.
• Credit for the elderly and disabled: A nonrefundable credit up to $1,125
• Two mutually exclusive credits for college expenses.

Businesses are also eligible for several credits. These credits are available to individuals and corporations, and can be taken by partners in business partnerships. Among the federal credits included in a "general business credit" are:

• Credit for increasing research expenses.
• Work Incentive Credit or credit for hiring people in certain enterprise zones or on welfare.
• A variety of industry specific credits.

In addition, a federal foreign tax credit is allowed for foreign income taxes paid. This credit is limited to the portion of federal income tax arising due to foreign source income. The credit is available to all taxpayers.

Business credits and the foreign tax credit may be offset taxes in other years.

States and some localities offer a variety of credits that vary by jurisdiction. States typically grant a credit to resident individuals for income taxes paid to other states, generally limited in proportion to income taxed in the other state(s).