Plug In New Electric Vehicle Credits

Changes taking effect over two years

The popularity of electric vehicles (EVs) continues to grow. According to the Energy Information Administration, it is estimated that EVs will have comprised 16.3% of all U.S. new car purchases in 2023 (up from 12.5% in 2022). Hybrid, plug-in hybrid and battery-electric vehicles reached 17.9% of all new light-duty vehicle sales in the second half of the year.

If you bought one of these vehicles last year, you may be in line for a big tax credit on your 2023 tax return, based on changes in the Inflation Reduction Act (IRA). However, be aware of new “stop” and “go” signals for EVs acquired in 2024.

Starting point: The tax law authorizes a tax credit for EVs, including plug-in hybrids, that meet certain energy consumption standards. The maximum credit is $7,500, regardless of cost. The credit is claimed on the tax return for the year in which you purchase the vehicle. Furthermore, you must meet other technical requirements, including a limit on the gross vehicle weight rating (GVWR).

In addition, be aware that the credit is nonrefundable. Finally, the credit is only available to vehicle owners. Lessees do not qualify for a tax break.

 Notably, the IRA includes the following key provisions relating to tax credits for EVs.

• Single filers cannot claim the credit with modified adjusted gross income (MAGI) above $150,000 or above $300,000 for joint filers.

• The credit is not available for most passenger vehicles that cost more than $55,000. The limit is $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks.

• For the full credit, the vehicle must be powered by batteries whose materials are sourced from the U.S. or its free trade partners and must be assembled in North America.

• Previously, the credit was eliminated for EVs of manufacturers with EV sales of 200,000 or more vehicles. But this ban no longer applies to vehicles purchased after 2022.

Note that the recent legislation also provides a credit of up to $4,000 to purchasers of used vehicles under a separate set of rules. For example, the credit is available to single filers with MAGI of no more than $75,000 or no more than $150,000 for joint filers. But the vehicle cannot cost more than $25,000, it must be at least two years old and you can only claim the credit once every three years.

What about new EVs purchased in 2024? Availability of the credit is being winnowed by the manufacturing rules. At this writing, only 18 EVs qualify for the credit in 2024, according to the U.S. Department of Energy.

That is the bad news. The good news: Instead of waiting until you file your 2024 return to claim the credit, you can obtain a rebate at the point of sale.

To participate in the program, dealers must register through an online system that allows them to verify the vehicle’s eligibility. But you remain responsible for meeting the income requirements. If you surpass the threshold, you will have to “pay the IRS back” on your tax return.

Finish line: If you have any more questions, your professional tax advisors can steer you in the right direction.

Last Call for IRA Contributions

When to claim deductions

Time is running out on a tax planning technique that can reduce 2023 tax return liability. If a taxpayer qualifies, they can deduct their contributions to a traditional IRA, but the rules are tricky.

Background: The maximum amount you can contribute to a traditional IRA for the 2023 tax year is the lesser of 100% of earned income or $6,500 or $7,500 if you are age 50 or older. You have until the filing due date for 2023 returns—April 15, 2024—to make a contribution. However, if you obtain a filing extension, this does not extend the time for making a contribution for the 2023 tax year.

For starters, contributions are tax-deductible, but the deduction is phased out if the individual (or spouse, if married) actively participates in an employer’s qualified retirement plan, like a 401(k) plan, AND their modified adjusted income (MAGI) exceeds the annual threshold. The figures for 2023 are as follows. (These thresholds are also increasing for 2024.)

• The phase-out range for single filers who are active plan participants is between $73,000 and $83,000 of MAGI and between $116,000 and $136,000 for joint filers.

• If one spouse of a couple is an active participant in a plan, the phase-out range is between $218,000 and $228,000 of MAGI.

For example, a 40-year-old single filer who has a MAGI of $78,000 for 2023 and participates in an employer’s 401(k) plan can deduct 50% of a $6,500 contribution, or $3,250. These IRA contributions are deducted ”above the line” so they reduce adjusted gross income (AGI) for other tax purposes.

Best of all, contributions made to an IRA can continue to compound without any current tax erosion until withdrawals are made. This may supplement a qualified retirement plan.

Caveat: This tax break is available if the individual has “earned income” such as compensation from a job. If they only have investment income, they cannot deduct their contributions to an IRA.

Note, however, that a couple can contribute to a spousal IRA if just one spouse works. For example, if one spouse has wages of $100,000, they can effectively double the annual contribution to $13,000. Accordingly, the maximum for a spousal IRA where both spouses are age 50 or over is $14,000.

What about Roth IRA contributions? Similar rules apply. For instance, the contribution limits for Roth IRAs are the same as they are for traditional IRAs. Alternatively, you can combine traditional and Roth IRA contributions up to the total limit of $6,500 for 2023 or $ 7,500 if you are age 50 or older.

However, contributions to Roth IRAs are never tax-deductible, although future payouts are completely exempt from tax if the Roth has been in existence for at least five years and you are age 59½ or older. In contrast, the portion of a traditional IRA distribution representing deductible contributions and earnings is taxable at ordinary income rates.

Practical approach: Consult with your professional advisors regarding your personal situation.

How to Thwart a Family Feud

Planning ahead for an estate

Even close-knit families may be torn apart after the death of a parent, especially if the will is contested in court. Even worse, this sort of rift might easily have been avoided with advance planning.

Hypothetical example: Mrs. Smith, a widow, has three children: the oldest, Adam, is an entrepreneur; the middle child, Barbara, is a psychologist; and the youngest child, Cheryl, just began teaching at an elementary school. While Adam and Barbara are each married, well‑settled and prosperous, Cheryl still lives at home.

Naturally, Mrs. Smith loves all her chil­dren, but she would like to provide some extra money for her youngest, who is not as likely to earn as much during her life as her siblings. Also, Cheryl might have to help care for Mrs. Smith as she gets older.

However, if Mrs. Smith amends her will to leave more than one‑third of her estate to Cheryl, the other two children may feel slighted. And since Cheryl lives at home, they might also suspect undue influence. To avoid a family dispute, here are three possibilities for Mrs. Smith to consider.

1. She can establish a trust through her will (called a “testamentary” trust). Mrs. Smith may keep all three children as equal beneficiaries and appoint a neu­tral party as trustee (e.g., a close friend or professional advisor). Once the trustee understands Mrs. Smith’s intentions, they may be given absolute discretion to direct the money to where it is needed the most.

Hopefully, Adam and Barbara will understand when Cheryl receives an additional benefit. (They do not need the extra money anyway.) And they are less likely to contest the will under these conditions.

2. Mrs. Smith can begin a program of life­time gifts. For 2024, she can give each recipient up to $18,000 without paying any gift tax. Frequently, wills are contested because the decedent is not alive to explain what they wanted. If Mrs. Smith gives away property while she is alive, her intentions are obvious.

It is doubtful that Adam and Barbara will contest the validity of a lifetime gift to Cheryl. And, if they do, they run the risk of being written out of the will altogether.

3. Mrs. Smith might state in her will that anyone who contests it will be disinherited. (The statement is called an “in terro­rem” clause in legal terminology.) This type of clause gen­erally is enforced by the courts to discourage litigation.

Note: It is usually best to provide something—no matter how little—for everyone in the immediate family. In any event, Mrs. Smith should mention the names of all of her children, even if only to say that she is leaving them nothing. Otherwise, the children may wind up in court anyway. Reason: One child may claim that an omission shows incompetency at the time the will was executed.

In summary: Of course, this is a highly sensitive area for most families, but do not procrastinate. Talk things over with your children now to preserve family harmony in the future.

Cleaning Up Nanny Tax Obligations

Liability for household workers

If you have someone who helps around the house while you (and your spouse, if you are married) work, you may be surprised to learn that the IRS effectively treats you as an “employer” for tax purposes. That means you must meet certain tax responsibilities relating to the worker under the “nanny tax.”

Do not be fooled by the name. The nanny tax is not limited to the super-rich and famous who employ an around-the-clock au pair at their beck and call. It can also apply to families of all incomes who employ a part-time household worker or someone who simply helps out with the kids after school.

Details: The tax law requires you to pay employment taxes if the wages paid to a household employee exceed an annual threshold. This threshold, which is relatively low, is $2,700 for 2024 (up from $2,600 in 2023). The nanny tax collectively incorporates the following three taxes.

1. FICA tax: FICA is comprised of the 6.2% Social Security tax and the 1.45% Medicare tax. Both the employer and the employee must pay the total 7.65% FICA tax. For 2024, the Social Security portion is owed on a wage base of $168,600 (up from $160,200 in 2023) while the Medicare portion applies to all wages.

Say you pay a housekeeper $200 a week with two weeks off for a total of $10,000 a year. The FICA tax that you and the worker each owe is $765 ($620 Social Security tax + $145 Medicare tax). You must withhold the worker’s share.

2. FUTA tax: An employer must also pay a 6% federal unemployment tax on the first $7,000 in wages, but this amount is generally reduced by a 5.4% credit if required amounts have been paid to the state. In this case, the effective tax rate is 0.6%.

3. State unemployment and disability taxes: Typically, an employer is also responsible for its share of these state taxes and for withholding the proper amount on behalf of an employee. If the taxes are not withheld, the employer must pay them.

Be aware that the nanny tax may apply to a wide variety of household employees, including nannies, babysitters, private nurses, caretakers, cleaning people, yard workers and other domestic workers if you have requisite control over the work relationship. If you pay an agency directly, however, the agency is treated as the employer of the worker and is responsible for these taxes.

On the other hand, if the worker controls how and when the work is performed and works for several households, they may be considered to be a self-employed individual. This often occurs when the worker offers services to the general public and provides the tools and supplies needed for the job. Self-employed individuals are responsible for the own employment taxes.

Finally, the nanny tax is not imposed on amounts paid to a spouse; a child under age 21, a parent (unless certain special conditions apply) or an employee who is under age 18 at any time during the year unless providing household services is the employee’s principal occupation.

What about you? Consult with your professional tax advisor concerning your personal situation.

Tackle NIL Income Issues

Is your child a star athlete in college? They may be fortunate enough to benefit from payments relating to their “name, image and likeness” (NIL).

Although the tax law in this area is still evolving, the IRS generally treats student-athletes who receive NIL income as self-employed individuals. Thus, they must report their annual business income, but may be entitled to deduct qualified expenses.

Huddle with your professional tax advisor for more details.

Facts and Figures

Timely points of particular interest

 Place Your Bets—Do you engage in online betting? If you are a winner, you must report the cash rewards as taxable income, whether you are betting on sports events, participating in Fantasy league contests or playing casino games. However, if you can substantiate losses from gambling activities, they are deductible up to the amount of your winnings. Caveat: Gambling losses may be deducted only in a tax year in which you itemize deductions.

Business Vehicles—The IRS has released the new depreciation limits for vehicles used for business driving. If you place a passenger car into service in 2024, the first-year dollar cap is $20,400, including the “bonus depreciation” tax break, based on 100% business use. The figures drop down to $19,800 in the second year and $11,900 in the third year.  For each succeeding year, the limit is $7,160. Bigger deductions are available for heavy-duty vehicles.