Changes in the Electric Vehicle Tax Credit
The Inflation Reduction Act of 2022 includes changes to the credit available for electric vehicles. The changes are complex, and phase in over time. If you are in the market for an electric vehicle, we should review the new rules to help you maximize the credit you are allowed.
North American assembly requirement. One of the new rules is in effect right now. To qualify for the electric vehicle credit, final assembly of the vehicle must take place in North America. You can check whether a particular vehicle meets this requirement by entering its vehicle identification number (VIN) into the VIN decoder . There is also a list of makes and models that generally should meet the requirement, but you should double-check for any particular vehicle by using the VIN decoder.
Manufacturer limitation. The good news is that, effective as of January 1, 2023, the manufacturer limitation is going away. Under the manufacturer limitation, once a manufacturer had sold 200,000 electric vehicles, a taxpayer’s ability to take a tax credit for vehicles produced by that manufacturer began to phase out. Taxpayers are currently prevented from taking the electric vehicle credit for automobiles manufactured by General Motors and Tesla. Starting at the beginning of 2023, taxpayers will be able to take the credit for GM and Tesla vehicles once again, but see the manufacturer’s suggested retail price (MSRP) limits below.
Calculation of the credit. The way the credit is calculated is changing later this year. We do not know when the rules are changing yet, but it will be as soon as the IRS issues regulations implementing the new rules. Under the previous rules, the base amount of the electric vehicle credit is $2,500 per vehicle. The allowable credit increases to $7,500 per vehicle based on a formula which increases the credit by $417 for every kilowatt hour of battery capacity in excess of five.
Under the new rules, the amount of the credit will be based on two separate requirements, each one based on where the vehicle’s battery is sourced:
- Taxpayers get a $3,750 credit for meeting the critical minerals requirement (which requires that a minimum percentage of the minerals contained in the battery be sourced in the United States or a country with which the United States has a free trade agreement in effect).
- Taxpayers also can get a $3,750 credit for satisfying the battery component requirement (which requires that a minimum percentage of the value of the components of the battery be manufactured or assembled in North America.
Taxpayers can satisfy either or both requirements, for either a $3,750 credit (if only one requirement is satisfied) or a $7,500 credit (if both requirements are satisfied).
The new rules are designed to encourage electric vehicle manufacturers to move their battery supply chains from China to North America or countries with which the United States has better relations than China.
New qualified fuel cell motor vehicle. Effective January 1, 2023, the credit will also be available for new qualified fuel cell motor vehicles. New qualified fuel cell motor vehicles are vehicles propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel, and that meets certain additional requirements. New qualified fuel cell motor vehicles have to meet the North American final assembly requirement. They can qualify for either a $3,750 or $7,500 credit based on whether they satisfy one or both of the critical minerals requirement and battery components requirements.
Modified adjusted gross income limitation. Starting on January 1, 2023, your ability to take the electric vehicle credit will be limited based on your modified adjusted gross income (MAGI). MAGI is adjusted gross income (AGI) with adjustments for income received from U.S. territories. For most taxpayers, MAGI will be equal to AGI. You may not take the credit if your MAGI exceeds the threshold amount. The threshold amount is:
- For married taxpayers filing a joint return or a surviving spouse, $300,000.
- For taxpayers filing as head of household, $225,000.
- For all other taxpayers (single, married filing separately), $150,000.
These amounts are not adjusted for inflation. If your MAGI exceeds this amount, you should buy the electric car before the first of the year.
MSRP limitation. Also starting on January 1, 2023, vehicles will not be eligible for the credit if they exceed an MSRP limit: $80,000 for vans, pickup trucks, and sport utility vehicles; $55,000 for other vehicles. This means that if you are looking at a higher-end electric vehicle, you need to act by the end of December.
Unfortunately, the manufacturer limitation (see above) will not go away until January 1, so you will not be able to claim the credit for higher-end GM and Tesla vehicles that exceed the MSRP limits.
Transition rule. Finally, if you had a binding contract to purchase an electric vehicle as of August 15, 2022, or earlier, you can choose to apply the old rules.
If you need help making sure that you will get the Maximum Credit the law allows under the new law give RMS Accounting a call and speak with one of our tax professionals, they are ready willing and able to assist you year round with this and any other tax issue.
The educator expense deduction has been increased for this year. Now teachers and other educators can deduct up to $300 in out-of-pocket classroom expenses when they file their 2022 federal income tax return.
Who qualifies? Anyone who, is a teacher, instructor, counselor, principal, or aide, from kindergarten through 12th grade in a school for at least 900 hours during the academic year. Those individuals are eligible to claim the educator expense deduction. Public school and private school educators qualify. Because this is an above-the-line deduction, an educator can claim it even if they take the standard deduction on their return.
What about married educators? An educator who is married to another educator and files a joint return may deduct up to $600 ($300 for each spouse’s qualifying expenses). For 2021, the maximum educator expense deduction was $500 for married educators filing jointly ($250 for each spouse’s expenses).
What is deductible? Educators can deduct the unreimbursed cost of “qualifying expenses” including:
- Books, supplies, and other materials used in the classroom
- Equipment, including computer hardware, software, and services
- COVID-19 protective items to stop the spread of the virus in the classroom
- Professional development courses related to the curriculum or students they teach
Special Note It may be more beneficial to claim the lifetime learning credit for professional development expenses. See IRS Publication 970, Tax Benefits for Education, particularly Chapter 3.
What isn’t deductible? Qualified expenses do NOT include the cost of homeschooling or nonathletic supplies for courses in health or physical education.
What documentation do you need? As with all deductions and credits, educators must keep good records including receipts, canceled checks, and other documentation to substantiate any claimed deduction.
The IRS has announced broad-based penalty relief for certain 2019 and 2020 returns due to the COVID-19 pandemic.
The penalty relief will be automatic for people and businesses who qualify. Relief applies specifically to the failure to file penalty. This penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late.
Relief is also available for various information returns, such as those in the Form 1099 series. The IRS Notice 2022-36 also provides details on relief for filers of various international information returns.
Penalties that have already been assessed will be abated. If already paid, the taxpayer will receive a credit or refund.
Today, August 24th 2022, President Biden announced a program to forgive student debt for qualifying taxpayers.
According to the announcement, those with qualifying student loans could receive between $10,000 and $20,000 in forgiveness.
Pell Grant recipients can qualify for up to $20,000 in debt forgiveness.
Those with other loans that do not have Pell Grants could qualify for up to $10,000 in debt forgiveness.
Qualifying taxpays need to earn less than $125,000 individually or $250,000 for married couples.
With this, like many of the programs announced by tweet or in front of the cameras in recent years, the devil will be in the details — which will take some time to flush out.
Questions yet to be answered:
Will the amount forgiven be subject to income tax?
What exactly gets counted as income and will any adjustments be permitted?
How will people apply for this program?
What other conditions or restrictions will exist?
Expect the Department of Education and the US Treasury to be writing rules and regulations as well as a possible court case on this.
Be sure to like and follow for updates.
Colleges Now Allow Student Athletes to Profit from the Use of Their Name, Image, or Likeness
The National Collegiate Athletic Association (NCAA) is now allowing athletes to receive compensation for the use of their name, image, or likeness (NIL). This new source of income for student athletes brings with it tax filing requirements, which make it advisable for young athletes to consult with a tax professional to assist with both tax planning and tax preparation.
When students receive a scholarship from a university, the amount of scholarship in excess of tuition has always been taxable. In most cases, this is the room and board element of the scholarship and it is included in taxable income. The NCAA has a Student Assistance Fund (SAF) to assist student athletes in meeting certain needs that arise in conjunction with participation in intercollegiate athletics. Typically, the SAF is used to handle the federal, state, and local income tax tied to room and board and other financial help. The SAF amount is also included in the athlete’s taxable income.
Income from Name, Image, or Likeness (NIL) will also be treated as income. In most cases it will also be subject to self-employment tax (social security tax). The athlete may also be entitled to deduct certain expenses from the NIL income for tax purposes when these expenses are directly related to the production of the NIL income. These deductions would include tax planning fees, agent fees, NIL related travel and other expenses directly related to the NIL income. They could also be entitled to a Qualified Business Income (QBI) deduction.
This additional income and tax could also create a liability on the part of the student athlete for quarterly estimated payments. If this seems like a lot of complication for a college student, it is, however tax laws are not based on how young or old a person is. They are based on the amount of taxable income received by a person. So the best bet for young athletes that are receiving scholarships, student assistance funds and/or name, image, or likeness income is to consult a tax professional that knows how to deal with these items.
Congress is funding an additional 87,000 IRS agents.
These new agents will need to cut their teeth on simple cases, where for the most part taxpayers are not big enough or rich enough to fight back. This means those receiving tax credits, operating small businesses, and a lot of gig economy workers should expect to get to know some of these new IRS employees very well.
Let’s face it the super-rich and big corporations have enough tax accountants and tax attorneys to keep these new IRS employees away. If you were the IRS, would you have new employees without the expertise and experience start with those who have the resources and the experience to have them chasing their tails? Or would you send them after the low hanging fruit?
Many lower income taxpayers and small businesses may just feel it’s cheaper to pay the additional tax assessed than it is to hire the professionals they need to fight the IRS (and these new employees) even if they did not do anything wrong.
Doing your own taxes? You may want to rethink this so that if (and when) the time comes you have a tax professional on your side.
In over 35 years of assisting new business startups, along with starting and running several businesses, I have found that most small business failures are due to 5 simple reasons.
1) You’re going to work more than 9-5.
Failure of the business owner to understand that he or she is no longer an employee, they are an owner. New business owners should expect to work more and harder than they ever worked as an employee.
2) Failure to utilize resources.
Failure to understand and learn about the things you don’t know by using the proper resources. These resources include accountants, attorneys, insurance agents, and other experts that can help properly set-up your business and ensure that you have the knowledge to prevent one customer, vendor, tax or regulatory mistake from ending your business.
3) Failure to keep control of cash and cash flow.
I have seen more than one business fail because the owner thought a big contract or job would make them rich and instead it tied up all their cash and put them out of business. It’s important to keep control over accounts receivable and never allow any customer to owe you more than your business can afford to lose. It is important to understand benefits for owners and employees come after cash flow. Programs like health insurance, pensions, and other perks are great when a business has the cash flow to support them however, they are a drain on resources for most small business startups.
4) Failure to properly plan financially.
Many entrepreneurs fail to understand and prepare for the amount of time and money it will take for a new business to reach a break-even point, let alone be profitable enough for you to receive the kind of compensation you walked away from to start your own business.
5) Spousal support matters.
This is not about how much money your significant other makes or puts in, it’s all about the support you get at home when it comes to working long hours that don’t always produce extra income. All too often new business clients come to me because they are afraid to share the problems they are having getting their business off the ground with their life partner. If your significant other does not support you it’s ten times harder to be successful.
So, what is a qualifying meal and who can deduct it?
Business meals are only deductible by the business. This includes partnerships, corporations, S corporations and sole proprietorships.
The deduction for business meals is generally 50% of the actual expenditure however until the end of 2022 100% of the cost of meals consumed in a restaurant are deductible. Avoid getting your business lunch at Seven Eleven or the grocery store where they are only 50% deductible and be sure to use a restaurant.
To be deductible the meal’s cost must be paid for by the business, either directly or through a reimbursement. Business meals are NOT deductible by employees. If you receive a W2 and are not reimbursed unfortunately you are out of luck, as you are unable to deduct this amount from your return.
For a business meal to be deductible it must be:
(1) ordinary and necessary AND paid or incurred during the tax year;
(2) NOT lavish or extravagant under the circumstances;
(3) the taxpayer, or an employee of the taxpayer, must be present at the furnishing of the food or beverages;
(4) food and beverages are provided to someone with a business relationship to the taxpayer’s business, a current or potential business customer, client, consultant, or similar business contact; and
(5) must not include the cost of entertainment
The deduction also requires substantiation be maintained including, the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. It’s important to set up a detailed record-keeping procedures to keep track of each business meal and to justify its business connection.
DID YOU KNOW: If you do short term rentals of 30 days or more per year for any two consecutive years in a row you could lose your homestead exemption.
This could mean paying tax on a much higher assessed value.
It has recently come to our attention that at least some property tax departments, including Broward County, have subpoenaed the records of Airbnb, Homeaway, VRBO, Tripadvisor and others for 2014 through 2020 to determine if additional taxes were due on properties listed as homesteads.
While short-term rentals of your home can create some extra income and, federal tax exempts income from up to 14 days per year of short-term rental income from a principal residence, rent days of 30 or more in two consecutive years is deemed to be abandoning your homestead exemption. This could result in additional real estate taxes and or tax liens on your home.
The IRS is back – at least when it comes to the sending of millions of letters to taxpayers whom it believes underpaid their taxes. The letter takes the form of a CP14 and it is important not to ignore these notices.
Just because you get a notice does not mean that you necessarily owe the additional amounts due shown by the IRS. A CP14 means that the IRS shows a balance due on a tax return. This could be due to a number of things including missing payments or credits. Check the notice to see if it accounts for all the payment shown on your return. If for some reason a payment is missing, or was mis-posted by the IRS you will need to provide proof of payment and a timely response to the IRS.
If the CP14 is correct and all payment have been accounted for, will need to pay the amount shown as the balance due. The CP14 notice will tell you how much you owe and request payment within 21 days.
Paying the amount shown by the due date will avoid the assessment of additional interest.
If you don’t pay the amount due within 60 days, the IRS can move to collect on the balance and even place a lien on your property, such your home or your car.
If you believe the IRS notice is incorrect or need help, give us a call and we will be happy to assist you
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