Desktop - Other Taxes and Recaptures - Tax Years 2020 and prior

If the taxpayer financed their home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), they may have to recapture all or part of the benefit they received from that program when they sell or otherwise dispose of the home. The benefit is recaptured by increasing the federal income tax for the year of the sale. The taxpayer may have to pay this recapture tax even if they can exclude the gain from income.

The recapture applies to loans that:

• Came from the proceeds of qualified mortgage bonds, or
• Were based on mortgage credit certificates.

The recapture also applies to assumptions of these loans.

Recapture of the federal mortgage subsidy applies only if the taxpayer meets both of the following conditions.

• Within the first 9 years after the date of receiving the federal subsidy or loan, the home is sold or otherwise disposed of at a gain;
• Their income for the year of disposition is more than that year’s adjusted qualifying income for their family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).

You may be able to take this credit if you acquired a qualified plug-in electric vehicle after February 17, 2009. A qualified vehicle can have 2, 3, or 4 wheels. A vehicle with 4 wheels must be a low speed vehicle.

Amount of credit. The credit is 10% of the cost of the vehicle, limited to $2,500 per vehicle.

Qualified vehicle. A qualified plug-in electric vehicle is a motor vehicle the original use of which starts with you and that:

1. Is acquired for your use or lease and not for resale,
2. Is made by a manufacturer,
3. Is manufactured primarily for use on public streets, roads, and highways,
4. Has a gross vehicle weight rating of less than 3,000 pounds if it has 4 wheels and less than 14,000 pounds if it has 2 or 3 wheels,
5. Is a low speed vehicle if it has 4 wheels, and
6. Is propelled to a significant extent by an electric motor that draws electricity from a battery that:
   • Has a capacity of at least 4 kilowatt hours (2.5 kilowatt hours
     in the case of a vehicle with 2 or 3 wheels),
   and
   • Is capable of being recharged from an external source of electricity.

Use Form 8611 if you must recapture part of the low-income housing credit you claimed in previous years because the qualified basis decreased from one year to the next or you disposed of a building, or your interest therein, and you did not follow the procedures that would have prevented recapture of the credit.

Use Form 4255 to figure the increase in tax for the recapture of investment credit claimed. Generally, you must refigure the investment credit and may have to recapture all or part of it if any of the following apply:

• You disposed of investment credit property before the end of 5 full years after the property was placed in service (recapture period).
• You changed the use of the property before the end of the recapture period so that it no longer qualifies as investment credit property.
• The business use of the property decreased before the end of the recapture period so that it no longer qualifies (in whole or in part) as investment credit property.
• Any building to which section 47(d) applies will no longer be a qualified rehabilitated building when placed in service.
• Any property to which section 48(b) applies will no longer qualify as investment credit property when placed in service.
• Before the end of the recapture period, your proportionate interest was reduced by more than one-third in a partnership (other than an electing large partnership), S corporation, estate, or trust that allocated the cost or other basis of property to you for which you claimed a credit.
• You returned leased property (on which you claimed a credit) to the lessor before the end of the recapture period.
• A net increase in the amount of nonqualified nonrecourse financing occurred for any property to which section 49(a)(1) applied.
• You received a grant under section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for investment credit property for which you figured a credit for any prior year.

Exceptions to Recapture

Recapture of the investment credit does not apply to the following:

• A transfer because of the death of the taxpayer.
• A transfer between spouses or incident to divorce under section 1041. However, a later disposition by the transferee is subject to recapture to the same extent as if the transferor had disposed of the property at the later date.
• A transfer of an interest in an electing large partnership.
• A transaction to which section 381(a) applies (relating to certain acquisitions of the assets of one corporation by another corporation).
• A mere change in the form of conducting a trade or business if:
  1. The property is retained as investment credit property in that trade or business, and
  2. The taxpayer retains a substantial interest in that trade or business. A mere change in the form of conducting a trade or business includes a corporation that elects to be an S corporation and a corporation whose S election is revoked or terminated.

Use Form 8874 to claim the new markets credit for qualified equity investments made in qualified community development entities (CDEs).

You may have to increase your tax by a credit recapture amount if at any time within 7 years from the date of the original issuance of the qualified equity investment:

• The entity ceases to be a qualified CDE,
• Substantially all of the proceeds of the investment cease to be used to make qualified low-income community investments, or
• The investment is redeemed or otherwise cashed out by the entity.

Exception: If a CDE fails to use substantially all of the proceeds of a qualified equity investment to make qualified low-income community investments, the CDE may avoid recapture of the credit if it corrects the failure within 6 months after the date it becomes aware (or reasonably should have become aware) of the failure. Only one correction is permitted for each qualified equity investment during the 7-year credit period.

You are not subject to recapture of the credit solely because you sell or otherwise dispose of your investment. However, you cannot claim the credit for any credit allowance date after the disposition.

Employers of American Indians who are qualified employees use Form 8845 to claim the Indian employment credit.

Taxpayers that are not partnerships, S corporations, cooperatives, estates, or trusts, and whose only source of this credit is from those pass-through entities, are not required to complete or file this form. Instead, they can report this credit directly on Form 3800.

Qualified employee means, for any tax period, any employee who meets all three of the following tests.

1. The employee is an enrolled member, or the spouse of an enrolled member, of an Indian tribe. Each tribe determines who qualifies for enrollment and what documentation, if any, is issued as proof of enrollment status. Examples of appropriate documentation will vary from one tribe to another and may include a tribal membership card, Certified Degree of Indian Blood (CDIB) card, or letter from the tribe or tribal enrollment office. Employers should retain a copy of the proof of enrollment status provided by the employee.
2. Substantially all the services performed by the employee for the employer are performed within an Indian reservation
3. The employee’s principal residence while performing such services is on or near the reservation where the services are performed.

Indian tribe means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village or regional or village corporation, as defined in, or established under, the Alaska Native Claims Settlement Act, that is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians. See the Federal Register dated July 12, 2002 (67 FR 46328), for the most recent listing of federally recognized Indian tribes.

Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 or section 4(10) of the Indian Child Welfare Act of 1978.

Employers use Form 8882 to claim the credit for qualified childcare facility and resource and referral expenditures. You may claim the credit any time within 3 years from the due date of your return on either an original or amended return.

The credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit is limited to $150,000 per tax year.

You may have to recapture part or all of the credit if, before the 10th tax year after the tax year in which your qualified childcare facility is placed in service, the facility ceases to operate as a qualified childcare facility or there is a change in ownership of the facility. However, a change in ownership will not require recapture if the person acquiring the interest in the facility agrees, in writing, to assume the recapture liability.

Any recapture tax is reported on the line of your tax return where other recapture taxes are reported (or, if no such line, on the 'total tax' line). The recapture tax may not be used in figuring the amount of any credit or in figuring the alternative minimum tax.

Expired for vehicles acquired after 2017. For more info, see here.

Form 8866 is used to calculate the interest due or interest to be refunded under the look-back method of section 167(g)(2) for property placed in service after September 13, 1995 that is depreciated under the income forecast method as described in section 167(g). (The income forecast method of depreciation is generally limited to motion picture films, video tapes, sound recordings, copyrights, books, and patents.) See the IRS instructions for Form 8866 for more information.

Use Form 8697 to figure the interest due or to be refunded under the look-back method of section 460(b)(2) on certain long-term contracts that are accounted for under either the percentage of completion method or the percentage of completion-capitalized cost method.

You must file Form 8697 for each tax year in which you completed a long-term contract entered into after February 28, 1986, that you accounted for using either the percentage of completion method or the percentage of completion-capitalized cost method for Federal income tax purposes. You also must file Form 8697 for any tax year in which the contract price or contract costs are adjusted for one or more of these long-term contracts from a prior year.

Form 8959 is used to calculate the amount of Additional Medicare Tax owed and the amount of Additional Medicare Tax withheld by a taxpayer’s employer, if any. Form 8959 must be filed if one or more of the following applies:

• Medicare wages and tips on any single Form W-2 (box 5) are greater than $200,000.
• Railroad retirement (RRTA) compensation on any single Form W-2 (box 14) is greater than $200,000.
• Total Medicare wages and tips plus your self-employment income (including the Medicare wages and tips and self-employment income of your spouse, if married filing jointly) are greater than the threshold amount for your filing status in the chart below.
• Total railroad retirement (RRTA) compensation and tips (Form W-2, box 14) (including the railroad retirement (RRTA) compensation and tips of your spouse, if married filing jointly) is greater than the threshold amount for your filing status in the chart below. Medicare wages and tips include amounts from Form W-2, box 5; Form 4137, line 6; and Form 8919, line 6. Self-employment income includes amounts from Schedule SE – Section A, line 4, or Section B, line 6. But negative amounts should not be considered for purposes of Form 8959.

Additional Medicare Tax. For tax years beginning after December 31, 2012, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount. The threshold amounts are listed below.

Medicare wages and self-employment income are combined to determine if a taxpayer’s income exceeds the threshold. A self-employment loss should not be considered for purposes of this tax. Railroad retirement (RRTA) compensation should be separately compared to the threshold.

The taxpayer’s employer is responsible for withholding the 0.9% Additional Medicare Tax on Medicare wages or railroad retirement (RRTA) compensation paid in excess of $200,000 in a calendar year. The employer is required to begin withholding Additional Medicare Tax in the pay period in which the taxpayer’s wages or compensation for the year exceed $200,000 and continue to withhold it in each pay period for the remainder of the calendar year.

Threshold Amounts for Additional Medicare Tax - The threshold amounts below are not indexed for inflation.

Use Form 8960 to figure the amount of Net Investment Income Tax (NIIT).

U.S. citizens and residents. Individuals who have for the tax year (a) modified adjusted gross income (MAGI) that is over an applicable threshold amount, and (b) net investment income, must pay 3.8% of the smaller of (a) or (b) as their NIIT.

The applicable threshold amount is based on your filing status:

• Married Filing Jointly or Qualifying Widower with Dependent Child is $250,000,
• Married Filing Separately is $125,000, or
• Single or Head of Household is $200,000.

Passive Activities. Net investment income generally includes income and gain from passive activities. A passive activity for purposes of net investment income has the same meaning as under section 469. A passive activity includes any trade or business in which you do not materially participate. A passive activity also includes any rental activity, regardless of whether you materially participate.

Real Estate Professionals. If you are a real estate professional for purposes of section 469(c)(7), your rental income, or loss will not be passive if you materially participated in the rental real estate activity. Rental income is included in net investment income if the income is not derived in the ordinary course of a trade or business. Qualifying as a real estate professional does not necessarily mean you are engaged in a trade or business with respect to the rental real estate activities. If your rental real estate activity is not a section 162 trade or business or you do not materially participate in the rental real estate activities, the rental income will be included in NIIT.