Want that $7,500 electric vehicle tax break? Why Buyers Should Talk to an Accountant and Not Just a Car Dealership
By Andrew Keshner
Consumers considering electric vehicles, solar panels or other home energy efficiency improvements aided by the Cut Inflation Act should do some tax planning before making major purchases.
More generous rewards are there for people looking for ways to reduce their carbon footprint at home and on the road.
Anyone considering the purchase of electric vehicles, solar panels (ICLN), or other home energy efficiency upgrades should do a little planning before major purchases. It’s not just about shopping around to determine cost, quality and availability, it’s also about tax planning.
The Inflation Reduction Act, the recently enacted federal law that ushers in the changes, adds more financial rewards for going green. For individuals, these rewards come mostly in the form of credits and deductions, which means more tax rules to consider. And in the case of electric vehicle credits (TSLA) (GM), there are income rules attached – which means even more tax provisions to consider.
New Jersey accountant June Toth constantly answers questions from customers who want to see if they can use the credits. A common question is about income eligibility and what can be done if someone is near or just above the income limits. “They’re really focused on their solar rooftops and electric vehicles,” said Toth, owner of zbt Certified Public Accounting & Consulting.
It is coming to an end for 2021 tax returns. People who got an extension earlier this year now have an October 17 deadline to file their returns. But it may be the start of the 2022 return planning that allows for the new, expanded tax breaks. In an era of four decades of high inflation, earning every penny means even more.
Here’s what to remember.
When the income rules apply
So you want the tax relief of up to $7,500 for a new electric vehicle? For an eligible new electric car, the sticker price cannot exceed $55,000. For SUVs, vans, and trucks, the price should stay under $80,000. Requirements for North American battery materials and sourcing have also increased over the years. Here are lists and government portals to help people determine which vehicles are eligible.
Be sure to check out potential incentives and tax breaks from certain states and utilities, Toth noted.
In federal tax breaks, potential buyers also need to remember their income. It applies to people whose adjusted gross income does not exceed $150,000. For people declaring as head of household, it can go up to $225,000. For married couples filing jointly, the income limit is $300,000.
The credit for qualifying used electric vehicles is $4,000 or 30% of the price, whichever is less. Here, credit goes to individuals earning $75,000, heads of households earning $112,500, and married couples earning $150,000. for this credit.
“One more dollar, you’re out. There’s no phasing out,” said Mark Steber, director of tax information at Jackson Hewitt, the national tax preparation firm.
The income caps take effect next year, but there is actually a two-year window for income eligibility. It applies to income for the year of the sale or the previous year.
“If your income is low enough to qualify based on 2022 numbers, there’s nothing you can 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 tax planning that could be done.”
The allure of a tax break is no reason to rush into a big ticket purchase, Steber and Toth said. This is especially the case if it is difficult to find an electric vehicle suitable for a potential buyer. Luxury manufacturers were largely first to market, although smaller, family-oriented vehicles are on the rise.
But if a person is close to the cap and buying a vehicle makes sense for them, there are ways to reduce annual income in the eyes of the taxman, they said.
A self-employed person has plenty of leeway, Steber said. For example, they may slow down when getting paid for their services or when sending bills that will ultimately earn taxable income. They also have business expense deductions to reduce their income. Ford (F) has a waiting list for the EV companion, known as Lightning, to its best-selling F-150. It’s a model that proponents of the electric transition say will be a big test of business owners’ interest in switching to electric vehicles.
Importantly, employees who receive a recurring paycheck from their employer can’t ask their boss to slow down paychecks, nor would they, Steber said.
They can delay the reaping of capital gains benefits. Another method, which might be easier in falling stock markets, is to collect capital losses in the tax loss harvesting strategy.
The Internal Revenue Service says that capital losses 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 always carry it forward to future tax years. “A lot of people are taking really big losses,” Steber said.
Increasing contributions to a 401(k) and/or IRA can be another tactic to reduce taxable income, Steber noted. Another strategy goes to people who itemize their deduction instead of taking the standard deduction. Here, for example, a household can pool their charitable contributions into a year to help reduce their income.
Other tax breaks for green energy
The good news is that there are no income rules attached to other green energy incentives in the newly enacted law.
The solar panel installation credit is 30% for panels installed between 2022 and 2032. This applies to the gross cost of the project, such as 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, such as the credit now called the “Home Energy Efficiency Improvement Credit”, can cover the costs of home energy audits, upgraded doors and windows, more efficient central air conditioners, heat pumps (which also push cold air, despite the name) and more.
However, proceed with caution to ensure that contractors and suppliers offer and install products that can actually benefit from the credit. That can be a particular risk with home improvement tax incentives, Steber said. “We’ve seen some people get burned with things that aren’t eligible.”
(END) Dow Jones Newswire
10-13-22 0300 ET
Copyright (c) 2022 Dow Jones & Company, Inc.