The EV Tax Credit

I was reading an article recently that approximately 40% of Americans have not heard about the EV tax credits.

EVs are battery powered cars. We used to have hybrids, which sometimes used a motor and other times a battery. EVs by contrast are 100% battery powered.

If you are thinking about buying one for personal use, here are a few markers to keep in mind:

(1)   There was an OLD tax credit and now there is a NEW tax credit.

a.     The OLD credit went through April 18, 2023.

b.    The NEW credit of course is after April 18, 2023.

Both credits can get up to $7,500, so what changed was the measuring stick.

Before April 19, the EV had to be assembled in North America.

After April 18, one test became two tests:

·       The battery itself has to be manufactured in North America, and

·       Then critical minerals in the battery (cobalt and lithium, for example) must be extracted or processed in the U.S. or in a country with which the U.S. has a free trade agreement.

Notice that OLD $7,500 credit (assembled in North America) has become two NEW credits of $3,750 each. You can get to $7,500, but along a different route.

It matters. For example, the new Ford Mustang Mach-E only qualifies for one of the credits – only $3,750 – because its battery comes from abroad.

Some – like the Genesis GV70 – used to qualify for the old $7,500 credit but no longer qualify for anything under the new rules.

If you are considering an EV, please double check whether the vehicle qualifies. Here is the Department of Energy’s website:

https://fueleconomy.gov/feg/tax2023.shtml

(2)   Congress included some price caps on qualifying vehicles. These things are expensive, and Congress was trying to exert downward pressure.

To qualify,

·       A van, SUV or pickup truck must cost $80 grand or less.

·       Any other vehicle (a sedan, for example) must cost $55 grand or less.  

(3)   Starting in 2024, you will have the option of using the credit immediately when you purchase the vehicle. It would make for an easy down payment, I suppose.  

The heavy lifting is done behind the scenes, as the dealerships will register on a new website to initiate and receive the credits. If you are curious, that website is: 

https://www.irs.gov/credits-deductions/register-your-dealership-to-enable-credits-for-clean-vehicle-buyers  

(4)   For the first time, used EVs will qualify for a credit. This credit will not be as large as the one for new EVs, but it is not insignificant either. Here are the ropes:

·       The price must be $25 grand or less.

·       The car must be at least two years old.

·       The car qualifies only once in its lifetime.

·       The credit is up to $4 grand, limited to 30% of the price.

·       You can claim the used EV credit once every three years.  

(5)   There are income limits on both the new EV and used EV credits. Make too much money and you will not qualify.  

For example:

New EV

           Married        income < $300,00

                                       Single          income < $150,000

                            Used EV

                                        Married       income < $150,000

                                        Single         income < $75,000  

You can test for income either in the year of purchase or the immediately preceding year. I am thinking – to be safe – that one should generally go with the preceding year. It would be no fun to apply a $7,500 credit against the purchase of an EV and then give it back because you reported too much income on your 2024 tax return.  

(6)   Up to now, we have been talking about buying an EV for personal use. There is a similar credit if you lease rather than buy, but some rules are different.

·       Since the leasing company (and not you) owns the vehicle, the income test does not apply.

·       The credit requires the EV be manufactured by a “qualified manufacturer” rather than the two-step qualification discussed above for a purchased vehicle. This should result in a wider selection.

·       Mind you, the leasing company is not required to pass (all or any of) this credit on to you. Education is important here - and expect negotiation.  

The reason the rules are different is that this second credit is designed for businesses – rather than individuals – buying an EV. By bringing in a leasing company, we flipped from the first to the second credit.  

I am not in the market for a car myself.  If I were, though, I would go in a very different direction.

Seeking Tax Exempt Status By Lessening The Burden Of Government

Let’s introduce Captain Obvious: if you want charitable tax-exempt status from the IRS, you need to have a charitable purpose.

Let’s look at New World Infrastructure Organization’s application for tax-exempt status.

It starts with two individuals: Scott and Pam Johnston.

They owned a business called The Pipe Man Corp (TPMC). Scott was the president and Pam the vice-president

TPMC was organized to develop a portable pipe manufacturing system, working and shaping pipe in larger-than-usual sizes. Combine these pipes with road infrastructure and a business opportunity was created.

TPMC never got started. I guess it needed angel investors, and the investors never appeared.

The Johnstons then organized a nonprofit corporation called New World Infrastructure Organization (New World).  Scott and Pam were its only officers and directors. TPMC granted New World permission to use its copyrights and patents, whatever that meant, given that Scott and Pam were the only two officers and were on both sides of the equation.

New World submitted an application for tax-exempt status, stating that its …

… ultimate purpose and core focus will be charitable, with … [its] main beneficiary being Federal, State and Local Government Agencies.

OK, its purpose has something to do with government.

… our research will result in encouraging Economic Development throughout the United States. It will save time, money and lessen the burden of government. The prototype machinery, after testing, will be placed into service making very large corrugated metal pipe. The pipes need to make a Highway Overpass can be made and arched in less than a week. The cost of these pipes represent a fraction of the cost of traditional methods.”

Lessening the burden of government can be a charitable mission. For tax-exempts, this generally means that a governmental unit considers the organization to be acting on its behalf. The organization is freeing up resources – people, material, money – that the governmental unit would have to devote were it to conduct the activity itself.   

It would be helpful to present a prearranged understanding with one or more government units, especially since New World was hanging so much of its hopes on the lessening-the-burden-of-government hook.

Helpful but not happening.

I am not clear how New World was lessening anything.

According to the narrative description, … [New World] intends to fulfill its charitable purpose by working with governmental agencies, engineering firms, and businesses to reduce the cost of infrastructure projects to ‘as little as one fourth current costs.’”

Wait a second. Is New World saying that its exempt purpose was to reduce the cost of projects to the government? That is not really an exempt purpose, methinks. Let’s say that you start a business and guarantee the government that you will beat a competitor’s price by 10%. That may or may not be a good business model, but you are still in business and still for-profit. Maybe a little less profit, but still for-profit.

How about if New World provided its services at cost?

… while petitioner has suggested … that it would be willing to enter into an exclusivity agreement … to sell its product at cost, it has not established through its bylaws or otherwise that it would in fact do so.”

Seems that New World wanted a profit. It is not clear what it would do with a profit, although there is the old reliable saw of paying-out profits via salaries and bonuses to its two officers and directors.

The Court saw a failed business effort slapped into a tax-exempt application. The supposed charitable purpose was to offer a lower price on infrastructure projects, which was not quite as inspiring as clothing the poor or feeding the hungry. It appeared that no governmental unit had asked to have its burdens reduced. It further appeared that there was a more-than-zero possibility of personal benefit and private inurement to the Johnstons.

Why even go to all this effort?    

I suppose the (c)(3) status would have allowed New World to obtain the funding that its predecessor – TPMC – was unable to obtain. TPMC would have issued stock or borrowed money. New World would have raised capital via tax-deductible charitable contributions.   

The Tax Court said no dice.

Our case this time was New World Infrastructure Organization v Commissioner, T.C. Memo 2021-91. 

Happy New Year

 

Roth IRA Recharacterizations Are Going Away

You may have heard that there has been a tax change in the land of Roth IRAs. It is true, and the change concerns recharacterizations.

And what does that seven-syllable word mean?

Let’s say that you have $50,000 in a traditional (or “Trad”) IRA. “Traditional” means that you got to deduct the money when you put it in. You did so over several years, and you now have – after compounding - $50 grand. Congrats.

You read that this thing is a tax bomb waiting to go off.

How?

Simple. It will be taxable income when you take it out. That is the bargain with the government: they give you the deduction now and you give them the tax later.

You decide to convert your “Trad” into a Roth. That way, you do not pay tax later when you take the money out.

You find out that it is pretty easy to convert, irrespective of what you hear on radio commercials. Let’s say your money is with Vanguard or T Rowe Price. Well, you call Vanguard or T Rowe and explain what you are up to. They will explain that you need a Roth IRA account. You will then have two IRA accounts:

          CTG Reader Traditional IRA, and

          CTG Reader Roth IRA

There is $50 grand in the Traditional IRA account.

You convert.

There is now $50 grand in the Roth IRA and $-0- in the Traditional IRA accounts.

You did it. Good job.

BTW you just created $50 grand of taxable income for yourself.

How? Well, you converted money from an IRA that would be taxable someday to an IRA that will not be taxable someday. The government wants its money someday, and that someday is today.

You didn’t think the government would go away, did you?

Let’s walk this thing forward. Say that we go into next year and your Roth IRA starts tanking. It goes to $47 grand, then $44 grand. The thing is taking on water.

It is time to do your taxes. You and I are talking. We talk about that $50 grand conversion. You tell me about your fund or ETF slipping. I tell you that we are extending your return.

Why?

That is what changed with the new law.

For years you have had until the date you (properly) file your return to “undo” that $50 grand conversion. That is why I want to extend your return: instead of having to decide on April 15, extending lets you wait until October 15 to decide. You have another six months to see what that mutual fund or ETF does. 

Let's say that we wait until October 8^th and the thing has stabilized at $43 grand.

You feel like a chump paying tax on $50 grand when it is only worth $43 grand.

I have you call Vanguard or T Rowe and have them move that money back into CTG Reader Traditional IRA. Mind you, this has to be done by October 15 as the tax extension will run out. We file your return by October 15, and it does NOT show the $50 grand as income.

Why? You unwound the transaction by moving the money back to the Traditional account. Think of it as a mulligan. The nerd term for what we did is “recharacterization.”

It is a nice safety valve to have.

But we will soon have recharacterizations no more. To be accurate, we still have it for 2017 returns but it goes away for later tax years. Your 2017 return can be extended until October 15, 2018, so October 15, 2018 will be extinction day for recharacterizations. It will just be a memory, like income averaging.

BTW there is a variation on the above that will continue to exist, but it is only a distant cousin of what we discussed. Let’s go to your 2018 tax return. In March, 2019 you put $5,500 in a Roth IRA. You will still be able to reverse that $5,500 back to a regular IRA by October 15, 2019 (remember to extend!).

But the difference is that the distant cousin is for one year’s contribution only. You will not be able to take a chunk of money that you have accumulated over years, roll it from a Trad to a Roth and have the option to recharacterize back to a Trad in case the stock market goes wobbly.

Sad in a way.

Individual Changes In The New Tax Bill

We have a new tax bill, and it is considered the most significant single change to the tax Code over the last 30 years. Here are some changes that may affect you:

·     Your tax rate is likely going down. A single person making $150,000, for example, will see his/her rate dropping from 28% to 24%. A married couple making $250,000 will see their rate drop from 33% to 24%. Whether married or not, the top rate has gone from 39.6% to 37%.

·     You will lose your personal exemptions next year. For 2017 the exemption amount is $4,050 for you, your spouse and every tax dependent. 

·      To make up for the loss of the personal exemptions, your standard deduction is going up in 2018. A single taxpayer will increase from $6,350 to $12,000. A married taxpayer will go from $12,700 to 24,000.

·      Many of your itemized deductions will be limited or go away altogether next year:

o   For 2017 you can deduct interest on up to $1 million on a mortgage used to buy your home.  In 2018 that limit will drop to $750,000.

o   For 2017 you can deduct interest on (up to) $100,000 of home equity loans. In 2018 you will be unable to deduct any interest on home equity loans.

o   For 2017 you can deduct your state and local income and real estate taxes, without limit. In 2018 the maximum amount you can deduct is $10,000.

o   For 2017 you can deduct a personal casualty loss (such as a car flooding), subject to a $100-deductible-per-incident and-10%-of-income threshold. You will not be able to deduct such losses in 2018, unless you are in a Presidentially-declared disaster zone.

o   For 2017 you can deduct contributions up to 50% of your income. In 2018 that increases to 60%.

o   If your contribution provides the right to purchase seat tickets to an athletic event – say to Tennessee or Ole Miss – you can presently deduct a percentage of that contribution.  In 2018 you will not be able to deduct any portion.

o   In 2017 you can deduct employee business expenses, certain similar or investment expenses, subject to a 2% disallowance. Starting in 2018 no 2% miscellaneous deductions will be allowed.

·     Medical expenses – for some reason – go the other way. Congress reduced the threshold from 10% to 7.5%, and it made the change retroactive to January 1, 2017. It is one of the few retroactive changes in the bill, and it will exist for only two years – 2017 and 018.

·     Get divorced and you might pay alimony. For 2017 you can deduct alimony you pay, and your ex-spouse has to report the same amount as income. Get divorced in 2019 or later, however, and your alimony will not be deductible, and it will not be taxable to your ex-spouse.

·      Move in 2017 and you may be able to deduct your moving expenses. There is no deduction if you move in 2018 or later.

·      You still have the alternative minimum tax to worry about in 2018, but the exemption amounts have been increased.

·      If you own a business, chances are the new tax law will affect you. For example,

o   If you own a C corporation, you will now pay tax at one rate – 21%. It does not matter how big you are. You and Wells Fargo will pay the same tax rate.

o   If you are self-employed, a partner or a shareholder in an S corporation, you might be able to subtract 20% of that business income from your taxable income. There are hoops, however. The new law will limit your deduction if you do not have payroll or have no depreciable assets, although you can avoid that limit if your income is below a certain threshold.

·     Your kid will provide a larger child tax credit. The credit is $1,000 for 2017 but will go to $2,000 in 2018.

What can you do now to still affect your taxes?

·      Rates are going down. Delay your income if you can.

·      For the same reason, accelerate your expenses, especially if you are cash-basis.

·      Prepay your real estate taxes. Yes, that means pay your 2018 taxes by December 31.

·      Pay your 4^th quarter state (and city) estimated tax by December 31. You may even want to sweeten it a bit, although the tax bill does not permit one to prepay all of 2018’s state tax by December 31.

·      Remember that you are losing your 2% miscellaneous deductions next year. If you use your car for work and are not reimbursed, you will lose out. It is the same for an office-in-home. 

·   Congress is limiting or taking away many popular itemized deductions and replacing them with a larger standard deduction. This means your remaining deductions – mortgage interest, taxes (what’s left) and contributions are under pressure to exceed that standard deduction. If you do not think you will be able to itemize next year, you may want to accelerate your contributions to 2017. Remember that the check has to be in the mail by December 31 to claim the deduction in 2017.

There are some surprises to be had, folks. I was looking at an estimated 2018 workup for a routine-enough-CPA-firm client. The result? An over 16% tax increase. What caused it? The loss of the personal exemptions. It was simply too much weight for the increased standard deduction and slightly lower tax rates to pull back up. 

I hope that is not the norm. This is a hard-enough job without having that conversation. 

The 2014 Tax Act and Professional Employer Organizations (PEOs)

We know that Congress passed, and the President signed, the Tax Increase Prevention Act of 2014 at the end of last year. This is the tax bill that retroactively resurrected certain tax deductions that many taxpayers have become used to, such as deducting sales taxes (rather than state income taxes)  should one live in Tennessee, Florida or Texas or deducting (a certain amount of) tuition payments if one’s child is in college.

There is something else this bill did that was not as well publicized.

It has to do with professional employer organizations, known as PEO’s. These are companies that provide human resource (HR) functions, such as the paperwork involved in hiring, as well as running payroll and depositing payroll taxes and other withholdings.

There has long been a hitch with PEOs and payroll taxes: the IRS considered the underlying employer to still be liable for withholdings if the PEO failed to remit or failed to do so timely. The IRS took the position that an employer could not delegate its responsibility for those withholdings. To phrase it differently, the employer could delegate the task but could not delegate the responsibility.

You can guess what happened next. There were cases of PEO’s diverting withholdings for their own use, then going out of business and leaving their employer-clients in the lurch. If you were one of those employer-clients, the experience proved to be very expensive. You had paid payroll taxes a first time to the PEO and then a second time when the IRS held you responsible.

The answer was to watch over the PEO like a hawk. The IRS encouraged employer-clients to routinely go into the electronic payment system (EFTPS), for example, to be certain that payroll taxes were being deposited.

That unfortunately collided with many an employer’s reason to use a PEO in the first place: to have someone else “take care of it.”

Back to the tax bill. Stuck in with the tax extenders was something called the ABLE Act, which is a Section-529-like-plan, but for disabled individuals rather than for college expenses.

Stuck (in turn) onto the ABLE Act was a brand-new Code section just for PEOs. The provision requires the IRS to establish a PEO certification program by July 1, 2015. There will be a $1,000 annual fee to participate, but – once approved – the IRS will allow the PEO to be solely responsible for the employer-client’s payroll taxes.

You have to admit, this is a marketing bonanza if you own a PEO. It will separate you from a non-PEO who is bidding on the same prospective client.

The PEO will have to post a bond in order to participate in the program. In addition the PEO will have to be audited annually by a CPA. The PEO will have to submit that audited financial statement to the IRS.

I do not know the answer as of this writing, but I have a strong suspicion the AICPA was in the room when that audit requirement was included. Why do I say that? Because only CPAs are allowed to render an opinion that financial statements are “presented fairly in accordance with generally accepted accounting principles.” 

NOTE: That would be CPAs who practice as auditors. There are CPAS who do not. For example, I specialize in taxes.

There is – by the way – risk to the PEO. This is not a one way street. The PEO will be responsible for the payroll taxes, even if the employer-client does not pay the PEO.

What ObamaCare Tax Forms Should You Expect For Your 2014 Return?

Are you wondering what, if any, new ObamaCare tax forms you will either be receiving in the mail or including with your tax return come April?

This was a topic at a tax seminar I attended very recently. What may surprise you is that the ObamaCare tax forms are still in draft; yes, “draft,” and I am writing this in the middle of December.

Let’s go over the principal tax forms you may see and how they fit into the overall puzzle. The 2015 filing season will be the initial launch, and some rules have been relaxed or deferred until the 2016 filing season. This means you may or may not see or receive certain forms, depending upon the size of your employer and what type of insurance is offered. Let’s agree to speak in general terms and not include every technicality, otherwise we will both be pulling out our hair before this is over.

The key form (I suspect) you will receive is Form 1095-B.

Form 1095-B

You will be receiving the “B” from the employer’s insurance company. Its purpose is to show that you had health insurance (“minimum essential coverage” or “MEC,” in the lingo), as failure to have health insurance will trigger a penalty. The form has four parts, as follows:

(1) The name and address of the principal insured person (probably you)

(2) The name and address of the employer

(3) The name and address of the insurance company

(4) The name and social security number of every person covered under the policy for the principal insured person. There are boxes for all 12 months, as the ObamaCare penalty is a month-by-month calculation.

What if your employer did not provide health insurance and you purchased coverage on the exchange? Now we are talking Form 1095-A, and the exchange will send it to you. It has three parts:

(1) The name of the principal insured person, as well as information about the marketplace itself and some policy information.

(2) The names and social security numbers of those covered under the policy.

(3) Monthly information, such as the premium amount and the amount of any subsidy (“advance payment”) received.

Form 1095-A

You will have received this form because you or a family member obtained health insurance through the exchange. You already know that the principal insured person (likely you) has to settle up with the IRS at year-end, comparing his/her household income, any subsidy received and any subsidy actually entitled to. The information on the “A” will – in turn – be reported on that form, which we will discuss in a minute.

We still have one more “1095” to talk about: the 1095-C. Frankly, I find this one to be the most confusing of the three.

Form 1095-C

The employer issues the “C.” Not all employers, mind you, only the “large employers,” as defined and subject to the $2,000/$3,000 penalty for not offering health insurance or offering health insurance that is not affordable.

You will not receive a “C” in 2015. Rather, you will receive one in 2016 if you were a full-time employee anytime during 2015. It can be included with your 2015 W-2, should your employer choose.

It has three parts:

(1) Employee and employer information, including identification numbers and addresses

(2) Recap of insurance coverage offered the employee, detailed for each month of the year. There are a series of codes to fill-in, depending upon a matrix of minimum essential coverage, minimum value, affordability and availability of family coverage.

(3) The third part applies only if the employer is self-insured.

BTW, you may have read that there is 2015 transition relief for employers having between 50 and 99 employees. That applies to the penalty, not to filing this paperwork. An employer with between 50 and 99 employees still has to file the “C.” You will receive this form in 2016 - if your employer has at least 50 employees.

NOTE: The IRS has said that employers can file this form “voluntarily” in 2015 for the 2014 tax year. Uh, sure.

Let’s recap. You would have received the “A”or “B” from a third party and (unlikely) a “C” from your employer. You now have to prepare your individual tax return. What new forms will you see there?

If you acquired insurance on an exchange, you will receive Form 1095-A. You will in turn use information from the “A” to complete Form 8962. Since you are on an exchange, you have to run the numbers to see if you are entitled to a subsidy. Combine this with the possibility that you received an advance subsidy, and you get the following combinations:

(1) You received a subsidy and it is exactly the subsidy to which you are entitled. I expect to see zero of these in my practice.

(2) You received a subsidy and it is less than you are entitled to. Congratulations, you have won a prize. Your tax preparer will include the difference and your tax refund will be larger than it would otherwise be.

(3) You received a subsidy and it is more than you are entitled to. Sorry, you now have to pay it back. Your refund will be less than it would otherwise be.

(4) You received no subsidy and you are entitled to no subsidy. I expect this to be the default in my tax practice. I suspect that we will not even have to file the form in this case, but I am waiting for clarification.

What if you did not have insurance and you did not go on the exchange? There are two more forms:

(1) If you have an exemption from buying insurance, you will file Form 8965. You have to provide a reason (that is, an “exemption”) for not buying health insurance.

(2) All right, technically the next one is not a form but rather a “worksheet” to Form 8965. The difference is that a worksheet may, but does not have to be, included with your tax return. A “form” must be included.

Form 8965

Form 8965 Instructions and Worksheet 

You are here if you did not go on the exchange and you do not have an exemption. You will owe the ObamaCare penalty, and this is where you calculate it. The penalty will go from here to your Form 1040 as additional taxes you owe.

And there you have it.

By the way, expect your tax preparation fees to go up.