A reader on the Agweb.com site left an interesting comment about my posting on the Ag Security Credit.  His question was whether an income tax credit needs to be recorded as income in the year after you take the credit.

The answer in almost all cases is no.  If a farmer takes a business tax credit such as the Ag Security Credit, they reduce their income taxes by the amount of the credit.  Since you can not deduct federal income taxes in arriving at your farm or other income, by default, a reduction in your federal income tax would not result in additional taxable income to you.

Also, there seems to be some confusion in how a tax credit works versus a deduction.  A credit is a 100% offset against your income tax while a deduction only offsets your tax based upon what tax bracket you are in.  For example, if you receive an income tax credit of $1,000 and your tax bill is at least a $1,000, then you will reduce your taxes by $1,000.  However, if you have a deduction of $1,000 and you are in the highest current income tax bracket of 35%, then you will only offset your tax bill by $350.

Please read the post at the Agweb.com site for further clarification.

In preparing income tax returns this tax season, I am seeing a lot more of the non-business energy property credit being taken on taxpayers returns.  This credit is for the installation of exterior doors and windows, insulation and related materials to make a home more energy efficient.  The credit is allowed for 30% of the costs of the products including installation costs.  This is a direct credit against your income taxes so it is much better than a deduction.  There is a limit of $1,500 and the credit is currently schedule to expire at the end of 2010.

Another related credit is for installing residential energy efficient property.  Projects that qualify are the installation of:

• Solar electric property;
• Solar water heating;
• Small wind energy;
• Geothermal heat pumps; and
• Fuel cell.

The nice thing about this credit is that there is no limitation on the amount that you can spend that will qualify for the credit.  This means that if you spend $100,000 on putting in a solar electric project, then you could deduct up to 30% of the cost against your income taxes.

Check both of these credits out and you should review this with your tax advisor to verify if the project applies to you.