EV Tax Credit Updates and Changes

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What is the EV (Electric Vehicle) tax credit?

The EV tax credit works similarly to other tax credits and can be applied when you file your tax return in the year after you purchased your vehicle. The minimum credit amount is $2,500, and the credit may be up to $7,500 based on each vehicle’s traction battery capacity and the gross vehicle weight rating. The credit applies to qualifying electric and plug-in vehicles, though the exact amount of the credit can vary depending on the make and model of the vehicle purchased. The credit is nonrefundable, meaning that it can only reduce your tax liability to zero – it will not result in an additional refund, even if the full amount of the credit is not used. While this tax credit has been available for many years now, the Inflation Reduction Act signed by President Biden on August 16th, 2022, has changed the credit in several ways.

Do I qualify for the EV tax credit?

In general, EV buyers can rely on the manufacturer’s certification to the IRS that the specific make, model, and year qualifies for the credit, and up to what amount. You can also reference https://www.fueleconomy.gov/feg/taxevb.shtml for any clarification. Additionally, there are income limitations – if you are a single filer and your modified adjusted gross income is over $150,000, you won’t qualify. The income limit for married filers is $300,000, and $225,000 is the limit for head of household. Per IRS guidance, the following requirements must also be met to qualify for the credit:

  • You must be the owner of the vehicle – if the vehicle is leased, then only the lessor may claim the credit
  • You must place the vehicle in service during the tax year
  • The vehicle is manufactured for use on public streets and highways
  • You are the original user of the vehicle, and did not acquire it for resale
  • You use the vehicle primarily in the U.S.

How do I claim the EV tax credit?

Currently and going forward, consumers that purchase a qualifying electric vehicle can claim the EV credit when they file their annual tax return. However, the Inflation Reduction Act has also established a way for car buyers to instead reduce the purchase price of a new qualifying vehicles by transferring the credit at the point of sale. This initiative is set to begin in 2024.

How does the Inflation Reduction Act change the EV tax credit?

Effective immediately (after August 16th, 2022), the tax credit is only available for qualifying electric vehicles “for which final assembly occurred in North America.” This information is still being determined, but the Department of Energy’s Alternative Fuels Data Center has developed a list of 2022 and 2023 vehicles likely to meet the requirement here: https://afdc.energy.gov/laws/inflation-reduction-act. You can also identify the North American assembly requirement by entering the vehicles VIN into the National Highway Traffic Safety Administration’s VIN Decoder tool and refer to the “Plant Information” field found here: https://vpic.nhtsa.dot.gov/decoder/

The Act also extends the EV tax credit for 10 years – until December 2032 – and will allow for a separate tax credit of either up to $4,000 or 30% of the price of previously owned clean vehicles (whichever is less), while removing the requirement that manufacturers producing more than 200,000 electric vehicles couldn’t qualify for the EV tax credit (meaning GM, Toyota, and Tesla EV owners among others now can claim the credit). Speaking of “clean vehicles” – the Inflation Reduction Act expands the EV tax credit to apply to any clean vehicle, meaning hydrogen fuel cell cars, plug-in hybrid vehicles (with certain battery capacities), and some commercial clean vehicles could also apply.

Vans, pickup trucks, and SUVs with MSRPs greater than $80,000 won’t qualify for the credit, and for clean cars to qualify the MRSP cannot exceed $55,000. Used clean vehicles will only qualify if they cost $25,000 or less and are at least two years old.

It is important to note that the only change to the existing EV credit taking effect before the end of 2022 is the new North American final assembly requirement – all other pre-Inflation Reduction Act rules are still in effect through the end of the year.

What if I purchased a qualifying electric vehicle prior to August 16th, but took possession of it after?

If you entered into a binding contract to purchase a qualifying EV prior to August 16th, the changes above regarding the North America final assembly requirement will not impact your tax credit, and instead you may claim the credit based on the rules that were previously in effect. Otherwise, the final assembly requirement will apply.

The Internal Revenue Service and the Department of the Treasury have stated that they will continue to provide updates regarding the EV tax credit in the coming months. We will also be following this issue closely and will keep up to date on any changes that may impact our clients for the 2022 and future tax years.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about the electric vehicle tax credit, please do not hesitate to contact us at Lear & Pannepacker.

Education Credits and Tax Planning

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What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOTC) is a federal tax credit for qualified education expenses paid for a student for the first four years of higher education. The maximum AOTC credit is $2,500 per eligible student. If your tax owed is reduced to zero after the credit is applied, you can have 40% of the remaining amount of the credit (up to $1,000) refunded to you. The AOTC credit is calculated as follows: 100% of the first $2,000 of qualified education expenses paid and 25% of the next $2,000 of qualified education expenses paid for qualified students. 

Who is eligible for the AOTC credit?

The eligibility requirements are as follows:

  • A student that is pursuing a degree or other recognized education credential
  • The student must be enrolled at least half-time for one academic period within the tax year
  • The student has not finished the first four years of higher education at the beginning of the tax year
  • The student has not claimed the AOTC for more than 4 tax years
  • The student does not have a felony drug conviction at the end of the tax year

How do I claim the American Opportunity Credit?

To claim the AOTC or Lifetime Learning credit the tax law requires a taxpayer (or a dependent) to receive a Form 1098-T, Tuition Statement, from their school by January 31st. This statement helps the tax preparer figure out the amount of your credit. 

Is there an income limit for claiming the AOTC?

Yes, there is an income limit for claiming the American Opportunity Credit. To receive the full credit a single or head of household taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). If your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly) you will receive a reduced credit. Once your MAGI is over $90,000 ($180,000 for married filing jointly) you are unable to claim the credit.

What is a 529 investment account?

A 529 plan is a tax-advantaged savings plan that helps to encourage saving for future education costs. A 529 plan has two types of plans: a prepaid tuition plan and an education savings plan. The prepaid tuition plans let savers or account holders purchase units or credits at participating colleges and universities for future tuition. Education savings plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses such as tuition, books, supplies, mandatory fees, and room and board. An education savings plan allows for withdrawals at any college or university and sometimes at non-U.S. colleges or universities. Education savings plans can also be used to pay for up to $10,000 per year per beneficiary for tuition at any public, private, or religious elementary or secondary school, which is something the prepaid tuition plans do not allow.

What happens if your child does not go to college but has a 529 plan?

A 529 plan is used for education-related expenses and when money is withdrawn for unrelated education expenses there is a 10% penalty assessed on the money that was taken out, and you will also be responsible for federal and state income tax on the earnings. If your child decides not to go to college, you are able to use their 529 plan to transfer funds to another child or to yourself if you plan on receiving a higher education. 

Contributions to a 529 plan

Contributions to 529 plans do not have annual contribution limits, but the contributions are considered completed gifts for federal tax purposes. For the 2022 tax year, the limit for gift contributions is $16,000 per donor. Any excess contributions must be reported to the IRS on Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption total.

What is a Coverdell Education Savings Account (ESA)?

A Coverdell Education Savings Account is a tax-deferred trust account that was created by the U.S. Government to assist families in funding educational expenses for the beneficiaries of the account. The beneficiaries of this account must be under the age of 18 when the account is created, but the age restriction can be waived for special needs beneficiaries. 

Contributions to a Coverdell Education Savings Account and Who Qualifies

The maximum contribution for a Coverdell Education Savings Account per year is $2,000 for any single beneficiary. A Coverdell Education Savings Account is only available to families below a certain income level which is based on their adjusted gross income. The AGI requirements are $95,000 or below for single taxpayers and $190,000 or below for married taxpayers for the full $2,000 contribution limit. The contribution limit is lowered for higher earners and phased out for single taxpayers with AGI of $110,000 or more and for married taxpayers with AGI of $220,000 or more.

How does a Coverdell Education Savings Account work?

A Coverdell Education Savings Account allows families to increase investment earnings through tax-deferrals provided the funds are used for educational purposes. When the contributions are distributed to the beneficiaries they are tax-free as long as it is less than the annual adjusted qualified education expenses. If the distributions from the account are greater than the qualified education expenses, the gains are taxed at the account holder’s rate. Coverdell Education Savings Account funds can be used for primary schools, secondary schools, and higher education. 

What happens if your child doesn’t go to college but has a Coverdell Education Savings Account?

If the child does not go to college and they do not use the money in the account by the age of 30 the amount will be distributed to them, and they will be taxed on that amount.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about education credits or tax planning, please do not hesitate to contact us at Lear & Pannepacker.

ASU 842 – Lease Accounting Update

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There are new accounting rules in effect for leases which are required for years ending December 31, 2022 and later. If you have leases for facilities, vehicles and/or equipment, you will need to adopt FASB Topic 842, which requires reporting of both a right-of-use (ROU) asset and a lease liability, for all leases with an initial term of more than one year. Historically, this was only done for capital leases, which will now be referred to as finance leases. This is the first significant change to lease accounting rules since the Financial Accounting Standards Board (FASB) adopted Statement Number 13 in 1976. As with any change of this magnitude, adequate planning and preparation are necessary, and in many cases, internal resources can become overwhelmed. In fact, many entities are underestimating the level of effort, complexity, resource requirements and timeline for adoption. Depending on the size and complexity of the lease portfolio, this can become a significant project.

Lease accounting compliance is not a one-size-fits-all process but there are some common steps that you can take to make sure you are heading down the right path. Getting the right support to assist you in making the transition is key.

  1. Collect data and assess lease portfolio. Determine what kind of leases you have and where the information is located.
  2. Summarize all your leases (payment streams, terms, etc.) Determine the lease term to be used, which could include renewal option terms if there is a significant economic loss that would be incurred by not renewing the lease. Also, if equipment maintenance is included in the monthly lease payment, you can elect not to separate this if it is not easily identifiable. 
  3. Determine the proper classification for each lease, either financing or operating. You can use a practical expedient which allows you to retain the prior classification for all leases in place prior to the adoption of this pronouncement, so capital leases would become financing leases and operating leases would remain as such.
  4. Weigh the impact – Do you have an implementation plan? How will your balance sheet be affected by this change? How will key financial ratios and loan covenants be affected? Evaluate your technology needs – Do you have a significant number of leases? Is it cumbersome to track them? Could lease tracking software simplify the process? Does the technology benefit justify the cost?
  5. Select a solution, which could include the purchase of a software package, development of a spreadsheet application, or utilizing the resources of Lear & Pannepacker to assist with the computations. Which path is right for you? Consider several key factors, including:
  • The number of leases in your lease portfolio, as well as the dynamic nature and complexity of your leases
  • Economic value and overall materiality of your leases
  • Your existing level of technical accounting expertise and knowledge of lease accounting
  • Capacity of resources within your organization for initial adoption and ongoing lease accounting
  • Your existing technology environment and solutions to support lease accounting

If you currently have a deferred rent liability (or asset), this will become part of the lease liability calculation under Topic 842. There are certain options available to non-public companies and not-for-profit entities in performing the computation of the ROU assets and lease liabilities, which we can help you to understand. You will need to determine the effective interest rate that will be used in computing the asset and liability. For financing leases (currently referred to as capital leases), an explicit rate must be used. For all operating leases, a risk-free rate of return is an easy option for most entities, but using your effective borrowing rate will produce a smaller liability. Once you have completed the summary, we can assist you with determining your effective interest rate and prepare the required calculations and required disclosures. We recommend that you start this process as soon as possible, to provide an opportunity to see how this will impact your financial statements and financial ratios before the year-end close.  

As these changes will only impact your balance sheet and will not affect your net income, there are no income tax implications of this accounting change. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about lease accounting or adopting FASB Topic 842, please do not hesitate to contact us at Lear & Pannepacker.