Electric vehicles (EVs) have rapidly gained traction in recent years, thanks in large part to financial incentives designed to encourage investment in this innovative technology. However, individuals considering an EV purchase should be aware of some significant policy updates that could influence their decision-making.
The Inflation Reduction Act, passed in 2022, brought sweeping changes to the tax credits available for EV buyers. Renamed the Clean Vehicle Credit, this updated program introduces notable adjustments effective in 2024. These include eliminating restrictions tied to a manufacturer’s sales volume, broadening eligibility to cover fuel cell electric vehicles, and offering substantial potential savings for qualifying buyers. Despite these advantages, accessing the updated benefits involves navigating a somewhat intricate process.
Qualifications and Price Limits for Vehicles
Starting in 2024, buyers of both new and used electric vehicles (EVs) can benefit from a tax credit, though several key limitations apply. New sedans and passenger cars must have a purchase price of $55,000 or less to qualify. Vans, SUVs, and pickup trucks are eligible only if their manufacturer’s suggested retail price (MSRP) does not exceed $80,000. For used EVs, the credit applies to vehicles with a price cap of $25,000.
In addition, vehicles qualifying for the credit must weigh under 14,000 pounds. Used EVs also must be at least two years old to qualify.
Requirements for Battery Components and Mineral Sourcing
To meet eligibility, 50% of a vehicle’s battery components must be manufactured or assembled in North America. Additionally, at least 40% of the critical minerals used in the battery must originate from North America. Failing to meet one of these conditions results in a reduced credit of $3,750.
This stipulation aligns with the U.S. government’s broader objective to reduce reliance on materials from nations considered “countries of concern.” Starting in 2024, components sourced from such countries will be disqualified. From 2025, this restriction will also apply to critical minerals.
Income Eligibility for Buyers
The revised tax credits also come with income-based limitations.
New EV buyers:
Single filers: Income must not exceed $150,000.
Heads of household: Limit is $225,000.
Joint filers: Eligible up to $300,000 combined income.
Married taxpayers filing separately: Income cannot exceed $150,000.
Used EV buyers:
Single filers and married individuals filing separately: Income must not exceed $75,000.
Heads of household: Limited to $112,500.
Married joint filers: Income cap of $150,000.
Credit Amounts
Taxpayers purchasing a new EV in 2024 may claim up to $7,500 in credits. For used EVs, the credit is capped at 30% of the purchase price, with a maximum benefit of $4,000. However, taxpayers can only claim the used EV credit once every three years.
Dealer Involvement and Direct Application
A new feature allows buyers to transfer credit directly to the dealer starting January 1, 2024. If the buyer and vehicle meet all qualifications, this transfer can reduce the purchase price of a new car by $7,500 or a used car by up to $4,000 at the point of sale. While this eliminates the buyer’s ability to claim the tax credit later, it simplifies the process and provides immediate savings. Credits may also apply to leased vehicles, offering an opportunity to lower monthly payments by reducing the vehicle’s sale price.
Claiming the Credit
Taxpayers choosing not to transfer their credit to the dealer must claim it themselves by filing IRS Form 8936 with their tax return. They will need to include the vehicle identification number (VIN) as part of the verification process. However, the credit cannot exceed the amount of tax owed, and any unused credit cannot be carried forward to future years. Please refer to your state-specific electric Vehicle Tax credit and registration fee listed here.
What is an LLC? Is an LLC a business entity? A Limited Liability Company can be a great way to grow a small business. It offers limited liability, something that can be helpful to its members.
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While this type of business organization can offer a lot of benefits, like limited liability protection, there are some drawbacks you’ll want to know about. Here’s what you should know, how to form one, and more information.
What is an LLC?
An LLC is a business entity type that offers owners, called members, limited liability. The qualifications are very broad: corporations, foreign entities, individuals, and other LLCs can join a Limited Liability Company.
It is important to note that an LLC can have an unlimited number of members. It is also possible to have a single-member LLC as well.
Do You Need One?
You may need a Limited Liability Company if you want to form a business entity that:
Allows you to form as a single member
Has no maximum number of members
Has the flexibility to file and pay taxes as other business entity types
What are the Benefits?
Forming an LLC has several benefits, which include:
A choice between manager-managed or member-managed
Limited liability
Fewer paperwork requirements
Flexible profit and loss allocation
Tax status flexibility
LLCs can operate as either a manager-run or member-run company. In manager-managed LLCs, members select managers to operate the business. These managers will conduct work for the company.
In member-managed LLCs, owners will have a role in daily operations. All members share limited liability, meaning they aren’t personally liable if the company experiences legal trouble.
Another benefit is the paperwork requirements. While other business entities require annual reports, board of director meetings, and state requirements, LLCs don’t have as many required forms of upkeep.
Fourth, profits and losses can be split in several ways. Members will agree to the terms of profits and losses in the Operating Agreement.
LLCs also have greater flexibility when it comes to tax status. They can experience taxation as a general partnership, meaning members will complete a Schedule K-1 to report profits and losses.
What are the Disadvantages?
Even though there are several benefits, there are also disadvantages.
In many states, if a member leaves an LLC, it must dissolve. The remaining members can start a new multi-member LLC, but those members will pay a termination fee.
Members must pay a self-employment tax if they file taxes as a general partnership. These members will be considered self-employed. As a result, these members will pay a self-employment tax.
How to Start an LLC
If you want to start an LLC, there are a few things that you’ll need:
Articles of Organization (to submit to your Secretary of State)
Business name (that is both available and unique)
Licenses and permits (which will vary by industry and state)
Newspaper notice (not a requirement in all states)
Operating Agreement
A registered agent (to receive legal documents)
Tax registrations
How to Convert to an LLC
You can convert your business entity to a Limited Liability Company if your business is:
A C-Corp
An S-Corp
A sole-proprietorship
First, you can convert your C-Corp by doing the following:
File Articles of Organization (required in most states)
File an Operating Agreement (contact your state’s Secretary of State)
Dissolve the C-Corp:
File and write the C-Corp’s Articles of Dissolution
Transfer assets
Another option you can consider is converting your S-Corporation to an LLC. To do this, you’ll:
File necessary paperwork
The exact paperwork and requirements will vary by state.
Some states may want you to send paperwork to the Secretary of State before converting your business.
Other states may require your LLC to merge with the S-Corp and name your LLC as the surviving company.
Liquidate assets for S-Corp and return them to shareholders.
After LLC receives state recognition, the S-Corporation shareholders will contribute to LLC’s assets.
A third option you can consider is converting your sole proprietorship. You’ll do this by:
Checking the availability of the proposed name
File Articles of Organization (required in most states)
File an Operating Agreement
Obtain an Employer Identification Number
Transfer assets
Differences between LLC, S-Corp, C-Corp, and Partnerships
If you want to form an LLC, you may want to know how it compares to other business entities. S-Corps, C-Corps, and partnerships have distinct advantages; learn more about how they stack up.
C-Corps
C-Corps and LLCs differ in important ways. First, C-Corps experience double taxation.
This means that taxation occurs once when the corporation’s income experiences taxation and again when members, called shareholders, experience taxation again on individual income.
LLCs don’t pay income taxes, but the members pay self-employment taxes. C-Corps experience double taxation, but shareholders don’t pay self-employment taxes.
Partnerships
While LLCs and partnerships may seem similar, there are some crucial differences. LLCs operate under an operating agreement that defines members’ percentages of ownership. Members will pay tax individually after profits are passed to its members.
Partners in a partnership share profits and losses of the business according to the percentage of their share. Partners will complete a partnership agreement before forming their partnership.
While a domestic LLC offers limited liability to all members, partners in partnerships have personal liability.
S-Corps
Finally, while an LLC has few member requirements, an S-Corp is different. An S-Corp must have a board of directors and corporate officers, two things not required with an S-Corp.
Second, S-Corps have a limit of 100 shareholders. An LLC has no limit to the number of people who can join.
Another difference is how long the business entities can exist. LLCs dissolve after their member or LLC owner leaves the company. S-Corps will continue if its shareholders leave the corporation.
Which business entity is right for you
Have you been dreaming about starting your own business? That’s wonderful! Becoming an entrepreneur can be an exciting and fulfilling journey. But where do you start? There is a lot to think about when establishing your new business.
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One of the first steps for many business owners is setting up their business entity. What is the legal business structure of your company going to be?
Whether you’re a rideshare driver, a ral estate professional, or a graphic designer, setting up your business entity is a critical decision. It will shape the way you make decisions about your business, and it will shape your personal and professional liability and your tax liability more generally.
What is a Business Entity?
A business entity is an organization created by one or more people to be a business to engage in a service or trade. It describes the legal status that the business has as an entity for purposes of taxes and regulation. When various levels of government look at your business, what will they see, and how will they interact with your company?
Business entities are formed at the state level, usually by filing documents with a state agency, such as the Secretary of State, and picking a registered agent to handle communication with the state. They’re often subject to taxation, so the business owners must plan on bookkeeping and filing a tax return for their businesses.
The type of business entity determines a lot about your tax status and other financial liabilities. There are five main types of entities that your new business could be:
Sole proprietorship
Partnership
S corporation
C corporation
Limited liability company (LLC)
What Are Your Options When It Comes to Entity Formation?
Sole Proprietorship
A sole proprietorship is one of the simplest business entities an entrepreneur can start. In fact, if you make any money as a self-employed individual, you have technically already started a sole proprietorship — maybe without even realizing it!
This entity type requires few forms for set-up, and only one owner exists. That means all decision-making about the business is quick and easy to manage because everything is up to you. You get to decide what happens to the business. It also means that all of the profits go to one person – you!
There are also downsides to a sole proprietorship. If you suffer losses, all of those are yours to bear. You can’t escape business debts because your business liabilities are personal liabilities. The business has no legal entity apart from you yourself, so sole proprietorships are taxed on your personal tax return. If your business goes bankrupt, your personal assets could be sold to pay off those bankruptcy debts.
Partnerships
Partnerships are also reasonably simple to set up, as very little paperwork is required. A partnership is a business entity owned and operated by two or more people who have contributed money or effort to start and run the business.
Your profits are split between you and your partners, depending on each person’s capital contribution ratio or on a predetermined ratio based on qualitative contributions.
As with sole proprietorships, if your business goes bankrupt, all of the partner’s personal assets are at risk of being sold to pay off creditors and debts. You form a partnership by filing paperwork with your state.
Limited and General Partnerships
Some partnerships split everything down the middle, sharing profits and decisions evenly, which is known as a general partnership. A limited partnership, however, will have duties and liabilities that vary between the partners.
Perhaps you don’t have a lot of money, but you’re willing to manage your new restaurant day in and day out for a percentage of profits. In that case, your limited partner may provide most of the funding while leaving the work to you and avoiding liability for business losses beyond their original investment.
Corporations
Corporations are unique business entities that are owned by shareholders. The shareholders elect a board of directors who oversee the operations of the business and are accountable to the shareholders.
Starting a corporation requires a lot of paperwork and is significantly more expensive to start than sole proprietorships and partnerships. You can take your unincorporated business and start the process to becoming a corporation by filing articles of incorporation with your state.
Corporations operate as completely separate legal entities from the owners. This means that the owners have limited liability for business losses, which is one of the most attractive things about corporations. Corporations can own property, raise capital through stock shares, acquire other businesses, and sue or be sued.
Corporations are often very highly regulated business entities; You will need to file annual reports and comply with other regulations to keep your business in good standing with the state.
C-Corps and S-Corps
There are two types of corporations, S-corporations and C-corporations, and the biggest difference between the two relates to taxation. C Corps are taxed separately from their owner; in an S Corp, the business passes profits to the shareholders. They then pay taxes on the business income directly on their personal income tax returns.
With a C Corp, you are effectively subject to double taxation. The corporation pays taxes on income, then it pays wages, and then everyone who receives those wages has to pay taxes on that income a second time.
S Corps avoid that issue, but generally, only small corporations are eligible for S Corp status. To qualify to file as an S Corp, a corporation must have only one class of stock and no more than 100 shareholders.
Limited Liability
Last but not least, we have Limited Liability Companies (LLCs). This entity type operates as a combination of partnerships and corporations, giving you the best of both worlds.
LLCs provide liability protection to the LLC owners, otherwise known as members of the LLC. This protects their assets, similar to how a corporation would. As with LLCs and partnerships, the profit share and operating agreement are determined by the members. If the parties agree, they can modify these as needed.
Forming an LLC requires paying for the status and filing your articles of organization. Many states may also require submitting your operating agreement, which outlines the bylaws and governance structures of your LLC.
As a member of an LLC, you will also need to pay self-employment taxes. This is the same as if you were operating a sole proprietorship or partnership.
Making the Right Choice for Your Company
There are a lot of different directions you can go when establishing your business entity. It will affect you personally and professionally, and it will definitely shape your tax liability now and in the future. Take the time to contemplate what exactly you want from your business and your goals.
Contact our experts if you’re feeling overwhelmed and unsure which entity is best for you. We’ve helped thousands of entrepreneurs like yourself with entity formation, and we’d be happy to discuss your options and help you get the ball rolling with your new business.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.
What Are Your Options When It Comes to Entity Formation?
Sole Proprietorship
A sole proprietorship is one of the simplest business entities an entrepreneur can start. In fact, if you make any money as a self-employed individual, you have technically already started a sole proprietorship — maybe without even realizing it!
This entity type requires few forms for set-up, and only one owner exists. That means all decision-making about the business is quick and easy to manage because everything is up to you. You get to decide what happens to the business. It also means that all of the profits go to one person – you!
There are also downsides to a sole proprietorship. If you suffer losses, all of those are yours to bear. You can’t escape business debts because your business liabilities are personal liabilities. The business has no legal entity apart from you yourself, so sole proprietorships are taxed on your personal tax return. If your business goes bankrupt, your personal assets could be sold to pay off those bankruptcy debts.
Partnerships
Partnerships are also reasonably simple to set up, as very little paperwork is required. A partnership is a business entity owned and operated by two or more people who have contributed money or effort to start and run the business.
Your profits are split between you and your partners, depending on each person’s capital contribution ratio or on a predetermined ratio based on qualitative contributions.
As with sole proprietorships, if your business goes bankrupt, all of the partner’s personal assets are at risk of being sold to pay off creditors and debts. You form a partnership by filing paperwork with your state.
Limited and General Partnerships
Some partnerships split everything down the middle, sharing profits and decisions evenly, which is known as a general partnership. A limited partnership, however, will have duties and liabilities that vary between the partners.
Perhaps you don’t have a lot of money, but you’re willing to manage your new restaurant day in and day out for a percentage of profits. In that case, your limited partner may provide most of the funding while leaving the work to you and avoiding liability for business losses beyond their original investment.
Corporations
Corporations are unique business entities that are owned by shareholders. The shareholders elect a board of directors who oversee the operations of the business and are accountable to the shareholders.
Starting a corporation requires a lot of paperwork and is significantly more expensive to start than sole proprietorships and partnerships. You can take your unincorporated business and start the process to becoming a corporation by filing articles of incorporation with your state.
Corporations operate as completely separate legal entities from the owners. This means that the owners have limited liability for business losses, which is one of the most attractive things about corporations. Corporations can own property, raise capital through stock shares, acquire other businesses, and sue or be sued.
Corporations are often very highly regulated business entities; You will need to file annual reports and comply with other regulations to keep your business in good standing with the state.
C-Corps and S-Corps
There are two types of corporations, S-corporations and C-corporations, and the biggest difference between the two relates to taxation. C Corps are taxed separately from their owner; in an S Corp, the business passes profits to the shareholders. They then pay taxes on the business income directly on their personal income tax returns.
With a C Corp, you are effectively subject to double taxation. The corporation pays taxes on income, then it pays wages, and then everyone who receives those wages has to pay taxes on that income a second time.
S Corps avoid that issue, but generally, only small corporations are eligible for S Corp status. To qualify to file as an S Corp, a corporation must have only one class of stock and no more than 100 shareholders.
Limited Liability
Last but not least, we have Limited Liability Companies (LLCs). This entity type operates as a combination of partnerships and corporations, giving you the best of both worlds.
LLCs provide liability protection to the LLC owners, otherwise known as members of the LLC. This protects their assets, similar to how a corporation would. As with LLCs and partnerships, the profit share and operating agreement are determined by the members. If the parties agree, they can modify these as needed.
Forming an LLC requires paying for the status and filing your articles of organization. Many states may also require submitting your operating agreement, which outlines the bylaws and governance structures of your LLC.
As a member of an LLC, you will also need to pay self-employment taxes. This is the same as if you were operating a sole proprietorship or partnership.
Making the Right Choice for Your Company
There are a lot of different directions you can go when establishing your business entity. It will affect you personally and professionally, and it will definitely shape your tax liability now and in the future. Take the time to contemplate what exactly you want from your business and your goals.
Contact our experts if you’re feeling overwhelmed and unsure which entity is best for you. We’ve helped thousands of entrepreneurs like yourself with entity formation, and we’d be happy to discuss your options and help you get the ball rolling with your new business.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Charlotte Accounting and tax Solutions assumes no liability for actions taken in reliance upon the information contained herein.
Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Note, however, that qualifying for such deductions became harder under the Tax Cuts and Jobs Act of 2017 (TCJA). If you previously claimed a home office as a miscellaneous deduction on your individual income tax return, the TCJA eliminated that deduction for tax years 2018-2025. You must now file a Schedule C on Form 1040 to be eligible for the home office deduction.
What Space Can Qualify?
Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.
Simplified Option
If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.
Tax problems are scary, especially when you’re facing them alone. If you need to file back taxes, deal with an IRS audit, or figure out how to pay mounting tax penalties and interest, we can help. The Charlotte, NC tax accountants at Josh Cahan, CPA specialize in resolving IRS tax problems. We will represent you in an audit or assist in filing delinquent taxes, ending wage garnishment, or releasing a tax lien or levy.
Tax Accountant in Charlotte, NC
The first step is contacting us to set up a time to talk so we can learn about your tax problems. Next we’ll review your tax documents and IRS notices and identify which tax relief options will bring the best results for your particular situation. Then, once we decide on the best route, we’ll take action. We’ll prepare your back taxes and will work with the IRS to set up an installment agreement, offer in compromise, or other plan to pay off your tax debt. If necessary, we can also support you in filing for a special tax provision like penalty abatement, innocent spouse relief, or currently not collectible status. Regardless of the tax problems you’re experiencing, you can rely on us to answer your questions with straightforward, reliable tax advice aimed at ending your tax problems once and for all.
Many homeowners are looking at the historically low interest rates on home mortgages and are refinancing their mortgages before rates start creeping back up. If you recently refinanced your mortgage or are considering doing so, you’ll want to understand the general tax rules for deducting the costs associated with refinancing.
Interest
Assuming you refinance debt that you incurred to buy, build, or substantially improve your main or second home, and that is secured by that home, interest on the refinanced debt is generally deductible. However, there are limitations on the amount of debt that can qualify for the interest deduction. First, it can’t be more than the amount of the original debt that has been refinanced. Additionally, the debt can’t exceed:
$1 million ($500,000 for married taxpayers filing separately), if the original mortgage that has been refinanced was taken after October 13, 1987, but before December 16, 2017; or
$750,000 ($375,000 for married taxpayers filing separately), if the original mortgage that has been refinanced was taken after December 15, 2017.
To deduct home mortgage interest, you must itemize deductions on your tax return. When you add up all of the individual deductions that you qualify for, they may or may not be more than the amount of the standard deduction for your filing status. If the total for the year is less than your standard deduction, then you will want to take the standard deduction.
Points
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs one percent of the mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest up front in exchange for a lower interest rate over the life of the loan.Points paid for the refinancing of your home mortgage are generally deductible over the life of the loan. If it is the second time you have refinanced your mortgage, any portion of the points you paid on the first mortgage that haven’t been deducted may be deductible in the year of the second refinancing.
Penalties and Fees
Generally, a prepayment fee paid on the old mortgage is considered a payment of interest on that mortgage and, therefore, is deductible in the year it is paid. However, other fees, such as those for credit reports, appraisals, and loan origination, are not deductible.Before refinancing, talk with a financial or tax professional who can crunch the numbers for you and help you determine the most opportune option available to you.
You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.
Standard Deduction or Itemizing
The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.
Home/Work Tax Breaks
If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.
Moving Expenses
Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.
Health Savings Accounts (HSAs)
HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.
Family Related Tax Credits
The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 17 at the end of the tax year (under age 18 for 2022) and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.
Section 529 Plans*
These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $80,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $160,000. (These limits may be inflation adjusted.)
Other Education Tax Breaks
As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.Keep in mind that there are income limits for these tax breaks.
Investments
To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:Selling securities with unrealized losses before year end to offset realized capital gains.Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.
Retirement
While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.Roth alternatives – available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own – provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.
Source/Disclaimer:
*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.**You should consider a fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.
You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.
Standard Deduction or Itemizing
The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.
Home/Work Tax Breaks
If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.
Moving Expenses
Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.
Health Savings Accounts (HSAs)
HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.
Family Related Tax Credits
The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 18 at the end of the tax year and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.
Section 529 Plans*
These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $85,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $170,000. (These limits may be inflation adjusted.)
Other Education Tax Breaks
As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.Keep in mind that there are income limits for these tax breaks.
Investments
To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:
Selling securities with unrealized losses before year end to offset realized capital gains.
Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.
You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.
Retirement
While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.Roth alternatives — available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own — provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.
Individual retirement accounts (IRAs) are retirement savings accounts that help people prepare for their future financial security in a tax-advantaged manner. They are relatively easy to open, contribute to, and invest in. There are two main types of IRAs — traditional IRAs and Roth IRAs. Each has different tax benefits and eligibility requirements. Here’s what you need to know to help you determine if an IRA could play an important role in your retirement planning.
Traditional IRAs
Your contributions to a traditional IRA are fully tax deductible when you and your spouse are not active participants in a workplace retirement plan. If you or your spouse actively participate in an employer plan, your ability to make a tax deductible contribution depends on your modified adjusted gross income (AGI) for the tax year. As income rises above certain thresholds, the tax deduction is reduced and eventually eliminated.*
Any earnings on investments held in a traditional IRA grow tax deferred. You will only pay taxes (at ordinary income tax rates) when you make withdrawals from the IRA, typically at retirement.
Roth IRAs
Your contributions to a Roth IRA are not tax deductible; you contribute with after-tax income. However, Roth IRA earnings accumulate tax deferred. You can withdraw your annual Roth contributions tax free at any time for any purpose. Once you have owned a Roth IRA for five tax years, distributions of Roth IRA earnings are also tax free if they are made:
On or after you reach age 59½;
For first-time home buying expenses (lifetime maximum of $10,000);
On account of you becoming disabled; or
To a beneficiary or your estate after your death.
Eligibility to contribute to a Roth IRA depends on your modified AGI. As AGI rises above certain thresholds, the allowable Roth contribution is gradually reduced to zero.** The Roth IRA income limits apply whether or not you participate in an employer’s retirement plan.
Timing Contributions
Eligible individuals may contribute as much as $6,000 (total) to one or more IRAs for 2022, or the amount of annual compensation, if less. The contribution limit for future years is subject to adjustment for inflation. A married couple may contribute up to twice the annual limit (or their joint annual compensation, if less), even if one of them does not earn income. An additional “catch-up” contribution of up to $1,000 is allowed for individuals age 50 or older.
You have until the April tax-filing deadline to contribute to an IRA for the prior year. You are not required to make your IRA contribution for the year in the full amount. However, if you can afford to do so, it may make sense for you to make your contribution as soon as you are eligible — January 1 of the year for which the contribution is being made. The earlier you contribute, the sooner your contribution can be invested and working on your behalf.
Selecting Investments
IRA providers offer account holders a variety of investment choices. Pay attention to taxes when choosing investments for your IRA. You won’t receive a tax benefit from holding certain investments, such as municipal bonds, in an IRA because municipal bond interest is generally not subject to federal income tax. However, keeping securities that pay taxable interest, such as corporate bonds, in your IRA may be advantageous since the interest income could accumulate tax deferred.
Your financial professional can explain in greater detail how you might benefit from opening either a traditional or a Roth IRA.
Source/Disclaimer:
*The 2022 phaseout ranges for deductible IRA contributions are $68,000 – $78,000 for single and head-of-household taxpayers, $109,000 – $129,000 for married taxpayers filing jointly, and $0 – $10,000 for married taxpayers filing separately. The deduction for a married taxpayer filing jointly who doesn’t participate in an employer plan (but whose spouse does) phases out with joint AGI between $204,000 and $214,000.
**The 2022 phaseout ranges for Roth IRA contributions are $129,000 – $149,000 for single and head-of-household taxpayers, $204,000 – $214,000 for married taxpayers filing jointly, and $0 – $10,000 for married taxpayers filing separately.