Unearned Tax Credits
Unearned income is profits from the sale of stocks, bonds and investment properties, including homes and businesses. An unearned tax credit is a direct reduction in tax liability based on the unearned income received from these investments. The Internal Revenue Service provides several of these credits to encourage more consumers to invest in property and buy new homes.
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Home Buying Tax Credits
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As of August 2011, the federal government extended the widely successful first-time home buyer tax credit. The government also raised the annual income requirements for the credit to allow more consumers to claim it on federal returns. This unearned tax credit provides a benefit of up to $8,000 to first-time home buyers and a tax credit of 10 percent up to a maximum of $6,500 for existing home buyers purchasing a replacement home. Single consumers may have an income of up to $125,000 while married couples may have an income of up to $225,000 to fully qualify for this unearned tax credit.
Low Income Housing Credit
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Landlords and residential building developers across the country are able to receive tax credits for choosing to rent a portion or all of residential properties to low-income tenants. According to the United States Department of Housing and Urban Development, the Low Income Housing Tax Credit is a variable tax credit depending on the cost of developing residential properties and the number of income tenants living in those properties. Builders and landlords who meet the program requirements may take a dollar-for-dollar tax credit based on the number of low-income tenants for up to 10 years.
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Capital Gains Tax Credits
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Capital gains tax is a tax on the unearned income from investments, including stocks and the selling of investment property. The IRS lists the capital gains tax rate between 15 and 28 percent depending on the source of investment profit. The Taxpayer Relief Act of 1997 provides a tax credit specifically for homeowners to help them avoid capital gains tax on the profits from selling a home. Single homeowners can shield up to $250,000 in profit from the sale of homes while married couples can protect up to $500,000.
Managing Unearned Income
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Unearned income from investments and tax credits based on those investments can have a negative affect on taxpayer eligibility to receive tax credits from earned income through working or business endeavors, For example, if consumers earn more than $3,100 in investment income, they are no longer eligible for the earned income tax credit. This may mean taxpayers lose out on refundable tax credits, including the earned income tax credit, in favor of unearned tax credits, which may not produce a refund.
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