Individual Tax Advice

Clean Vehicle Tax Credits 2023: Guide for New & Used EVs and FCVs Tax Credits

Eligibility for Clean Vehicle Tax Credit in 2023 and Beyond

If you purchase a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or later, you could qualify for a clean vehicle tax credit. The following summary does not address every situation and the limitations described below are complex so please consult your tax advisor to see if you qualify.

Who Qualifies for the New Vehicle Credit

To be eligible for a credit of up to $7,500 under Internal Revenue Code Section 30D for a new, qualified plug-in EV or FCV, you must:

Purchase the vehicle for personal use, not resale
Primarily use it within the U.S.

Moreover, your modified adjusted gross income (AGI) must not exceed:

$300,000 for married couples filing jointly
$225,000 for heads of households
$150,000 for all other filers

The Inflation Reduction Act of 2022 has amended the eligibility for this credit for vehicles bought from 2023 to 2032.

Credit Amount for New Vehicles

The credit amount for new vehicles is based on when you took delivery of the vehicle, regardless of purchase date.

For vehicles in service from January 1 to April 17, 2023, the credit consists of:

A base amount of $2,500
An additional $417 for vehicles with at least 7 kWh of battery capacity
A further $417 for each kilowatt-hour of battery capacity over 5 kWh
The total credit can reach up to $7,500

Vehicles placed in service from April 18, 2023, must meet new critical mineral and battery component requirements. The credit for these vehicles can be:

$3,750 if the vehicle meets only the critical minerals requirement
$3,750 if the vehicle meets only the battery components requirement
$7,500 if the vehicle meets both requirements

Eligibility for Used Clean Vehicle Tax Credit in 2023 and Beyond

From January 1, 2023, if you purchase a qualified used electric vehicle (EV) or fuel cell vehicle (FCV) from a licensed dealer for $25,000 or less, you could be eligible for a used clean vehicle tax credit. This credit amounts to 30% of the sale price, up to a maximum credit of $4,000.

Who Qualifies for the Used Vehicle Credit

To qualify for a credit for purchasing a used, qualified plug-in EV or FCV under Internal Revenue Code Section 25E, you must:

Be an individual who bought the vehicle for personal use, not for resale
Not be the original owner
Not be claimed as a dependent on another person’s tax return
Not have claimed another used clean vehicle tax credit within the three years prior to the purchase date

Moreover, your modified adjusted gross income (AGI) for the used vehicle credit must not exceed:

$150,000 for married couples filing jointly or a surviving spouse
$112,500 for heads of households
$75,000 for all other filers

Qualified Vehicles and Sales

A qualifying vehicle for either credit must:

Have a battery capacity of at least 7 kWh
Have a gross vehicle weight rating under 14,000 pounds
Be manufactured by a qualified company

For the used vehicle credit, the vehicle must also:

Have a sale price of $25,000 or less
Be a model that is at least two years older than the year of purchase
Not have been transferred to a qualified buyer after August 16, 2022
Be purchased from a dealer

How to Claim the Credit

To claim either the new or used clean vehicle credit, complete Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, and file it with your tax return for the year you took possession of the vehicle. You will need to include the vehicle identification number (VIN) on the form.

Contact CMR Associates today for more information on income tax credits and for tax preparation services or visit IRS.gov for additional information on these specific credits.

Tax Benefits of Real Estate Investing

This blog post was written by Charles Renwick and published by Quicken.

Everyone knows that planning for retirement and investing go hand-in-hand. However, as I’ve written previously, smart planning also considers both the current and long-term tax implications of your investment decisions.

We often talk about 401(k) and Roth IRA tax strategies (and these are great strategies) — however, we must be careful not to overlook the long-term investment prospects and tax benefits associated with real estate investing.

Real estate investing not only offers the potential for appreciation, regular income through rent, and the ability to multiply gains through financial leverage, but of course, it also offers compelling tax benefits!

First, a few caveats about real estate investing

Real estate investing is not necessarily easy, and economic returns are never a sure thing. Also, navigating the intricacies of tax codes and regulations can be intimidating, especially when you’re first getting started. However, compared to most other tax strategies, the majority of the tax benefits associated with real estate investing are not overwhelmingly complex.

While I always recommend you seek individual professional advice, I’ll outline a few of the basic real estate investing tax benefits here in the hope that you can use them to maximize your returns.

Tax benefits of real estate investing

1. Real estate depreciation

As you may have heard, depreciation is a significant tax benefit for real estate investors. But how does depreciation work exactly?

The IRS acknowledges that properties degrade over time and allows investors to deduct a portion of the cost of the property over its “useful life.” For real estate investors, these deductions can really add up.

This might seem obvious, but consider the implications and the benefits.

Primarily, consider the fact that depreciation is a non-cash deduction. This means that you can use the deduction to offset cash income, effectively resulting in tax-free cash income. This is almost as good as it gets in the world of tax benefits.

The deduction becomes even more compelling when you consider that there is no parallel for it in stock market investments. With those investments, you must wait until you sell the investment to take a deduction for the investment cost.

While it is true that maximizing depreciation can be a complex process, the basic concept and the general deduction are not complicated, and you can use this strategy to significantly increase your return on investment.

2. Real estate capital gains tax treatment

Our current tax code is designed not only to fund our national government but also to incentivize behavior. For example, the government wants to encourage long-term investing and has created a system that allows long-term investors to pay less tax!

For real estate investing, understanding this two pronged approach can pay real dividends, especially when it comes to gains on the sale of your investment.

Again, this is not complicated. The profit from selling a property at a higher price than you paid for it is considered capital gains, and if you hold the property for more than a year, these gains are generally either not taxed or taxed at lower long-term capital gains rates. This tax benefit is known as the “Long-Term Capital Gains Tax Benefit.”

Although this benefit is also available for other types of investments (for example, the stock market), this is considerably different than the tax consequences of a 401(k) investment, for example. While all gains on a 401(k) investment are deferred until retirement, the tax rate at retirement is the higher ordinary income tax rate — no matter how long you held those investments.

Best of all, real estate is a natural fit for the long-term capital gains tax benefit, especially if you intend to hold the property and rent it out for a number of years.

3. Business tax deductions for owners of real estate

Owning rental real estate is not only an investment but also a business. This seems obvious, but this concept has real tax-saving implications.

Specifically, because your investment is also a business, you are allowed to deduct ordinary and necessary business expenses associated with your real estatement investment. This means that lots of expenses you might otherwise pay anyway are now tax deductions!

For example, because you need a cell phone to manage your real estate investment, you are entitled to a tax deduction for a portion of the expenses associated with your cell phone — it is an ordinary and necessary business expense.

While there are hundreds of other expenses real estate investors can validly deduct, property taxes and mortgage insurance are the most obvious. These business deductions add up and can result in big tax savings for real estate investors. This is especially compelling because there is no similar concept or deductions available with stock market and 401(k) investing.

Conclusion:

The tax advantages of real estate investing are plentiful and can significantly enhance the profitability of your investments, helping you meet your retirement savings goals.

As with all things related to money, investing, and tax, it is critical to keep good records. Quicken is a great way to keep all of your records clean and organized.

This is especially important when it comes to real estate investing because the extra deductions available to those who keep good records are truly compelling.

As always, I recommend professional advise and assistance because tax laws are complex and frequently change. However, many of the overall tax benefits are obvious and easily accessible to all, so do not be afraid to ask questions and take the next step.

Remember, every investor’s situation is different, so the benefits you enjoy may vary. Nonetheless, understanding the tax benefits associated with real estate investing is an essential first step toward maximizing your investment returns and reaching your retirement goals through real estate investing.

Resolving the Banking Crisis: It’s Not About Credit, It’s About Structure

It’s Not About Credit, It’s About Structure

The current banking crisis is not primarily a credit crisis. Instead, it is a structural crisis caused by some institutions being considered “too big to fail.” This perception creates an uneven playing field in the banking industry, making it difficult for smaller banks to compete with their larger counterparts.

Large depositors and businesses cannot afford to take even the smallest risk of keeping their operating deposits at any institution other than those deemed too big to fail. Even if the risk of failure is as low as 0.0001%, this risk is still infinitely higher than the zero risk associated with banks that are too big to fail.

The longer we allow this unlevel playing field to persist, the more community banks will fail and at an accelerating rate. This poses a threat to the overall stability of the banking system and local economies.

Potential Solution: Level the Playing Field

There are several potential solutions to this problem. One such solution could be breaking up the larger banks, ensuring that all banks are small enough to fail. While this may be the most sustainable long-term solution, a more practical immediate solution for the current situation involves drastically increasing the amount of deposit insurance available for deposits at smaller banks.

Furthermore, the cost of this increased deposit insurance should be borne by the larger banks that are considered too big to fail. These banks are the root cause of the problem, and they unfairly benefit from a lower cost of capital due to the implicit guarantee provided by the federal government.

By implementing these changes, we can help level the playing field in the banking industry and support the survival and success of community banks. This will ultimately contribute to a more stable and resilient financial system that serves the needs of all its stakeholders.

How to Maximize Your Tax Refund for 2022

Written by Charles Renwick. Published by Quicken on September 20, 2022.

https://www.quicken.com/blog/how-to-maximize-your-tax-refund

Another year-end is approaching and it’s time to start thinking about taxes.

“But I get a W-2. There’s nothing I can do for tax planning!”

I hear this a lot. It is true, the options available to W-2 employees are more limited than the options available to small business owners. But that doesn’t mean you don’t have options. Let’s take a look at the problem, review some common expenses you need to deduct, and consider ways to save money on taxes this year.

Maximizing your refund as a W-2 employee

The W-2 problem in tax planning

The Tax Cuts and Jobs Act of 2017 made significant changes to how individuals are taxed. Perhaps the most impactful changes were the revisions to the individual deduction rules. Specifically, the standard deduction was doubled, and previously allowed deductions like unreimbursed business expenses for W-2 employees were limited or eliminated.

While this “simplified” tax reporting for thousands of Americans, it also created a situation that does not seem fair because now, only small business owners can take advantage of the most popular deductions.

Popular deductions that W-2 employees can’t claim

Home office: As a W-2 employee in the cloud-computing, post-COVID-19 era, you probably sometimes work from home. You might think that you can deduct your home office expenses. Sorry, you can’t.
Cell phone: You likely use your cell phone for work all the time, right? If you’re like most people, your cell phone is used for business calls and emails more than it is for personal calls and emails. But can you get a tax deduction if you pay for your cell phone bill yourself? Nope.
Mileage/vehicle: Gas is expensive and you go the “extra mile” to get the job done for the company. The company budgets are tight and your boss can only reimburse a fraction of your actual costs of ownership. But at least you get a tax deduction, right? Wrong again.

The solution

So if you have all these business expenses but you can’t deduct them because you’re not a small business owner, what can you do? Become a small business owner! It’s actually easier than you think. The two best ways to become a small business owner are:

Buy and manage rental properties, or
Work a side gig that pays a 1099

When you have rental properties or a side gig that pays a 1099, you open up opportunities to deduct lots of your expenses that you can’t deduct as a W-2 employee. The particular rules for each deduction are important and I am not suggesting you claim deductions unrelated to your new small business. But overlapping expenses that are necessary for your new small business are fair game, and you are entitled to deduct at least a portion of these expenses that would otherwise not be deductible.

Using business deductions to maximize your refund

Rental property or 1099 tax planning: the basics

At a high level, rental property operations and 1099 side gigs are considered business. Therefore, they get to take business deductions. What qualifies as a business deduction is very much based on the business purpose and facts and circumstances, but in general, there are lots of expenses that qualify that you would not otherwise be able to deduct.

Popular rental property or 1099 tax deductions

Again, the business purpose and your specific facts and circumstances are the main considerations when looking for deductions, but here is a list of popular deductions to give you an idea of the kinds of things you should be tracking because they are usually deductible.

Internet Expenses
Business Meals
Business Travel Expenses
Advertising Expenses
Supplies Expenses
Insurance Expenses
Repairs and Maintenance
Professional Services
Rent Expenses
Utilities Expenses

Other things to consider

Your tax deduction increases your return on investment (ROI)

Rental property investments and side gigs are already a great economic opportunity for growing wealth. But the additional tax benefits you gain make these opportunities even more compelling. For example consider this scenario:

You pay a marginal 25% income tax rate
You make an extra $5,000 working a side gig
This side gig allows you to access $5,000 in deductions you previously were not able to access

What’s the economic result? You effectively increase your side gig income by 33%. Why? Because without the deductions, you would have had to make $6,666 in income to keep that $5,000 after taxes. In other words, your deductions allow you to earn that $5,000 tax free.

Does this mean you’ll get a big tax refund? Not necessarily. That depends on the rest of your financial picture including how much you paid in taxes during the year and how much you owe overall. But those business deductions are reducing your total tax obligation. Whether you get a bigger refund or you just pay less, you win either way.

Keep clean records and receipts

Documentation is always important when it comes to ensuring you have minimal risk if audited, and you need to keep your records and receipts for three years. Using accounting software like Quicken keeps you organized and ensures you don’t miss any deductions.

Use a CPA

This is a general disclaimer but also some good advice. As you can see from the example above, a small side gig has significant tax consequences. In fact, the amount of money at stake is far greater than the nominal cost of using a CPA. Because everyone’s situation is different and the facts and circumstances matter, a CPA can make sure everything is done correctly. Plus, a CPA might identify additional tax savings opportunities.

So what are you waiting for? Year-end is approaching — start planning now!

IRA account value down? It might be a good time for a Roth conversion

The coronavirus (COVID-19) pandemic has caused the value of some retirement accounts to decrease because of the stock market downturn. But if you have a traditional IRA, this downturn may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

The key differences

Here’s what makes a traditional IRA different from a Roth IRA:

Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred.

On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.

Roth IRA. Roth IRA contributions are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.

However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.

Saving tax

This is where the “benefit” of a stock market downturn comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.

It’s important to think through the details before you convert. Some of the questions to ask when deciding whether to make a conversion include:

Do you have money to pay the tax bill? If you don’t have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

What’s your retirement horizon? Your stage of life may also affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.

Of course, there are more issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss with us whether a conversion is right for you.