Energy and EV Credits in Recent Inflation Reduction Act

The primary goal of the bill signed by President Biden this past August 16 was to provide assistance to America’s working families to help them manage the recent surge in inflation.  The Act’s objectives are to lower prescription drug costs, healthcare costs, and energy costs.

The energy cost portion of the bill aims to improve efforts to fight climate change.  This bill includes several energy related tax credits available to taxpayers as an incentive for our society to become more eco-friendly.  Electric vehicles and energy efficient home improvements continue to be the core of these available tax credits.  Some of these tax credits are new, some are revised, and some are extended.  A summary of the key energy tax credits included in the bill are listed below.

  • Beginning in 2023 the tax credit for energy efficient improvements in your house (qualifying doors, windows, insulation, etc.) will increase to a $1,200 annual limit from the current $500 lifetime limit. For 2022, the $500 lifetime limit will still apply.  Beginning in 2023 the tax credit will also be increased from 10% to 30% of the qualified costs for such improvements.
  • The tax credit for installing renewable energy sources such as solar, wind, and geothermal energy sources has been increased from 26% of the total installation cost of the completed project to 30% of the total installation cost. This revised and extended tax credit is effective for such projects completed in 2022 and going forward through 2032.  This tax credit drops to 26% and 22% for completed projects in years 2033 and 2034, respectively.  This credit expires December 31, 2034.
  • More stringent rules to qualify for a tax credit related to the purchase of an electric vehicle (EV) are being implemented. The credit now known as “the clean vehicle credit” goes into effect beginning January 1, 2023.  Primarily due to specific limits now being applied to EV purchases, these new rules will adversely impact taxpayers that previously would have qualified for the former EV tax credit:
    • Taxpayers will not qualify to claim the tax credit if their adjusted gross income exceeds:
      • $150,000 for Single and Married Filing Separate filers
      • $300,000 for Joint filers
      • $225,000 for Head of Household filers
    • The EV’s final assembly must be in the USA (this change takes place effective August 17, 2022)
    • There is no longer a 200,000 cap on the number of vehicles sold to date (GM and Tesla EV purchases will again be eligible for the tax credit).
    • New price limit restrictions on qualifying EV purchases:
      • For sedans and hatchbacks the MSRP of the vehicle cannot exceed $55,000 to qualify for the tax credit.
      • For SUVs, trucks and vans the MSRP of the vehicle cannot exceed $80,000 to qualify for the tax credit.
    • New tax credit for the purchase of used EVs:
      • For used EV’s at least 2 years old or older
      • Purchased from a dealer
      • The credit equals 30% of the cost of the used EV capped at $4,000
      • Only used EV purchases less than $25,000 qualify for the tax credit
      • Taxpayers will not qualify to claim the tax credit if their adjusted gross income exceeds:
        • $75,000 for Single and Married Filing Separate filers
        • $150,000 for Joint filers
        • $112,500 for Head of Household filers
      • The “Made in America” requirement for new EV purchases does not apply to used EV purchases.
    • Beginning in 2024 individuals qualifying for the tax credit for EV purchases can transfer the tax credit to the dealer and “cash in at the point of sale” when the auto is purchased.
      • Transferring the tax credit to the dealer at the time of purchase will allow the vehicle purchaser to buy the EV at a discounted price without having to wait until the following year to claim the tax credit on their tax return, as it the case now.
    • The Alternative Fuel Refueling Property Credit extended to 2032
      • Installation cost of a home charging station for EVs
      • Tax credit is 30% of supplies and labor costs capped at $1,000

Given this new set of qualifying parameters included in the Inflation Reduction Act, and the cost of a typical EV generally only affordable by higher income earners, the question becomes – Will any taxpayers qualify to claim this revamped federal income tax credit related to their EV purchases?

Practice Owners: Leadership Versus Management

Leadership and management are two distinct functions at your practice.

Leadership

Did you know that great business leaders don’t ask what their staff can do for them? Instead, great leaders ask what they can do to help their staff improve. Perhaps the next time a staff person makes a mistake, don’t complain that the employee hurt your practice.  Take a few minutes to realize that you may have let that employee down and consider ways to help them improve at their job.

Yes, that sounds backward, right?  But if you think about how leaders are in a position to help their underlings develop, you’ll agree that the relationship detailed above actually makes a lot of sense.

Management

According to The One Minute Manager (a 45-minute must read business classic) available on Amazon at: https://www.amazon.com/New-One-Minute-Manager/dp/0062367544,  effective managers follow these three steps when helping their staff do their jobs to the best of their abilities:

  • Clearly explain the work to be done
  • Find any reason to praise employees in public
  • When mistakes are made, reprimand in private and start the meeting by giving the staff person time to explain why they did what they did

Utilizing Your Family’s 529 Accounts For The Upcoming Academic Year

Have you saved money in a 529 plan to pay for your kids’ college? Wondering which education expenses you can pay from the 529 account as qualified expenses and which expenses are non-qualified?

With students heading back to school, now is a great time to begin planning for your 529 plan distributions for the coming academic year. Please keep in mind that 529 plan distributions used for qualified education expenses are 100% tax-free while distributions used for non-qualified education expenses result in the earnings portion of those distributions being subject to income taxes plus a 10% penalty.

The following expenses qualify as an educational expense for 529 plan distributions:

  1. Tuition and fees at post-secondary educational facilities such as colleges and universities, both graduate and undergraduate. Vocational and trade school institutions plus two-year colleges qualify as well.
  2. Student loan payments – subject to a lifetime cap of $10,000.
  3. College room and board fees if the student is enrolled at least half-time. Off campus housing and meals also qualify, capped at the cost of the on-campus room and board fees (based upon the college’s published cost of attendance (COA)).
  4. College books and school supplies. Often, this limit is set by the college.
  5. Computer and tech expenses that are required for enrollment by the college and required by specific classes. This qualified expense also includes internet expenses incurred by students.
  6. Special needs equipment needed by a student to attend a post-secondary institution. Travel expenses, generally not allowed as a 529 plan qualifying expense, often qualify for special needs students.
  7. Tutoring costs.
  8. For grades K – 12, up to $10k per year can also be used for tuition at private schools.

And these expenses do NOT qualify as an educational expense for 529 plan distributions:

  1. Premiums paid for student health insurance while attending post-secondary schools, even for a policy offered by the school.
  2. Travel costs to and from the qualified school, such as airfare, gas and hotels.
  3. Extracurricular activities while attending school.
  4. For grades K – 12, home schooling costs unless determined by your state that home schooling qualifies as a form of private school.

If you child has opted to study abroad, 529 plan distributions may still qualify to be used for foreign educational expenses. Several hundred foreign educational institutions accredited by the US DOE qualify count. Parents and students can check the link provided by the www.savingforcollege.com to learn which foreign schools allow for tax-free 529 distributions.

Third Quarter Tax Estimates Due 9/15

Don’t forget – third quarter estimated taxes are due 9/15.

For anyone paying estimated taxes, we now recommend that you make those payments online.  It’s safer than sending the IRS a check, and you receive an instant confirmation that the payment has been processed.  Sadly, the IRS hasn’t done a great job lately at processing their mail.

To make the payment online if you haven’t yet set up an account with the IRS, simply:

  1. Go to irs.gov
  2. Click on Make a Payment (https://www.irs.gov/payments)
  3. Click on Pay Now with Direct Debit (https://www.irs.gov/payments/direct-pay)
  4. Click on Make a Payment (https://directpay.irs.gov/directpay/payment?execution=e1s1)
  5. Select the following
    1. Reason for Payment: Estimated Tax
    2. Apply Payment To: 1040ES
    3. Tax Period for Payment: 2022

Answer the rest of the questions and you should be all set to make the payment.

Most states also allow you to pay any state estimates due using their Tax Department website.