• Home
  • Stock News
  • TaxWatch: Want that $7,500 EV tax break? Why buyers need to talk with an accountant and not just a car dealer

Post: TaxWatch: Want that $7,500 EV tax break? Why buyers need to talk with an accountant and not just a car dealer

More generous rewards are here for people eyeing ways to reduce their carbon footprint at home and on the road.

Anyone considering electric vehicle purchases, solar panels
ICLN,
-2.53%

or other home energy efficiency upgrades should do some planning first before the big-ticket purchases. That’s not only shopping around to determine costs, quality and availability, it’s tax planning too.

The Inflation Reduction Act, the recently-enacted federal law ushering in the changes, is adding more financial rewards for going green. For individuals, those rewards mostly come in the form of credits and deductions, which mean more tax rules to consider. And in the case of credits for electric vehicles
TSLA,
+0.34%

GM,
+0.34%
,
there are income rules attached — which means even more tax provisions to ponder.

New Jersey accountant June Toth has been constantly fielding questions from clients who want to see if they can put the credits to use. A common query is about income eligibility, and what can be done if someone is near or just above the income caps. “They are really focused on their solar roofs, and electric vehicles,” said Toth, owner of zbt Certified Public Accounting & Consulting.

It’s coming to the end for 2021 tax returns. People who got an extension earlier this year now have an Oct. 17 deadline to file their returns. But it can be the start of planning for 2022 returns that allow for the new and broadened tax breaks. In a time of four-decade high inflation, raking in every last penny means even more.

Here’s what to remember.

Where income rules apply

So you want the tax break of up to $7,500 for a new electric vehicle? For a qualifying new electric car, the sticker price cannot exceed $55,000. For SUVs, vans and trucks, the price has to stay under $80,000. Requirements on the battery’s North American materials and sourcing also ratchet up through the years. Here’s government lists and portals to help people determine which vehicles are eligible.

Don’t forget to check for potential incentives and tax breaks from select states and utilities, Toth noted.

In the federal tax breaks, would-be buyers also need to remember their income. It applies to individuals with adjusted gross incomes up to $150,000. For people filing as head of household, it’s up to $225,000. For married couples filing jointly, the income limit is up to $300,000.

The credit for qualifying used electric vehicles is either $4,000 or 30% of the price, whichever is less. Here, the credit goes to individuals making $75,000, heads of household making $112,500 and married couples making $150,000.

But while other income caps of recent memory (like those for stimulus checks) gradually faded away for people with income above the cap, it’s not so for this credit.

“One dollar over, you’re out. There is no phase out,” explained Mark Steber, chief tax information officer at Jackson Hewitt, the national tax preparation company.

The income caps go into effect next year, but there’s actually a two-year window for income eligibility. It applies to the income during the year of the sale, or the previous year.

“If your income is low enough to qualify based on the 2022 numbers, there is nothing to do for 2023,” said Lawrence Pon, of Pon & Associates in Redwood City, Calif. “However, if your 2022 income is too high and you expect 2023 to be higher, then there could be some tax planning that could be done.”

Next steps

The allure of a tax break is no reason to pounce on a big ticket purchase, both Steber and Toth said. That’s especially the case if it’s tricky to find an electric vehicle that makes sense for a potential buyer. Luxury makers have largely been first to market, although smaller and family-oriented vehicles are on the rise.

But if a person is close to the cap and the vehicle purchase makes sense for them, there are ways to lower yearly income in the eyes of the taxman, they said.

A self-employed worker has a good amount of leeway, Steber said. For example, they can slow down when they get paid for their services, or when they send out invoices that will ultimately rake in taxable income. They also have business expense deductions to shave down income. Ford
F,
-0.17%

has a waiting list for the EV companion, known as the Lightning, to its best-selling F-150. It’s a model that electric-transition proponents suggest will be a big test of business owner interest in switching to EVs.

Importantly, employees who get a recurring paycheck from their employer cannot ask their boss to slow down paychecks, nor would they want to, Steber said.

They can delay reaping the profits from capital gains. Another method, which could be easier in the dipping stock market
SPX,
-0.33%

s, is gathering capital losses in the strategy of tax loss harvesting.

The Internal Revenue Service says capital loses can offset capital gains; when losses exceed gains, an investor can deduct up to $3,000 from their income. If an investor is still in the red, they can still carry it forward to future tax years. “A lot of people are holding some really big losses,” said Steber.

Increasing contributions to a 401(k) and/or an IRA can be another tactic to lower taxable income, Steber noted. Another strategy goes to the people who itemize their deduction instead of taking the standard deduction. Here, for example, a household can bunch their charitable contributions in one year to help lower their income.

Other green energy tax breaks

The good news is there’s no income rules attached to other green energy incentives in the newly-enacted law.

The credit related to solar panel installation is 30% for panels installed between 2022 and 2032. That applies to the gross cost of the project, like parts and labor, Toth noted. Important documents for tax purposes include an invoice for work performed and proof of payment, she said.

Other tax breaks, like the credit now called the “Energy Efficient Home Improvement Credit” can defray costs on home energy audits, upgraded doors, windows, more-efficient central air conditioners, heat pumps (which push cold air around too, despite the name) and more.

Still, proceed with caution to make sure contractors and vendors are offering and installing product that actually can qualify for the credit. That can be a particular risk with tax incentives tied to home improvement, Steber said. “We’ve seen some people that get burned with things that don’t qualify.”

Add Your Heading Text Here

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Market Insiders