September 2022 – Cassandra Lenfert, CPA, LLC

I wanted to make sure all of my clients are aware of the Colorado First Step Program, which is a program designed to kickstart college savings. Any child born or adopted after 1/1/20 in Colorado can receive a free $100 contribution from the state of Colorado to a Colorado CollegeInvest 529 Savings* account. Even better, once you open a CollegeInvest account via the First Step program, you can also participate in the Matching Grant program. This program matches your contributions to your CollegeInvest account dollar-for-dollar, up to $1,000 per year for 5 years! This means you could get up to $5,000 in matching contributions from the state of Colorado. There are no income limits on this program. Even if you don’t have young children, you likely have other children (grandchildren, nieces and nephews, family friends, etc.) in your life who could benefit from this program.

Almost makes me want to have another baby to get the $5,000 match…just kidding!!!

For more information and to sign up for the First Step program, visit the CollegeInvest First Step page here: https://www.collegeinvest.org/first-step/

Children born before 1/1/20

There is also a separate CollegeInvest Matching Grant program for children born before 1/1/20. There are more restrictions, including income limits, with this program. CollegeInvest doesn’t really advertise this program as much as the First Step program, but all of the details are available on their website here: https://www.collegeinvest.org/matching-grant-program/ The child must be 8 years old or younger to apply for the first time to the program. I have utilized this program for my children so I’m pretty familiar with it.

CollegeInvest business contributions

CollegeInvest also has a program that allows an employer to make contributions to a Colorado 529 plan owned by an employee, and the employer receives a Colorado tax credit of 20% of the contribution. CollegeInvest states that this is available when the employer and employee are the same i.e. a small business owner/self-employed person. The maximum contribution that qualifies for this tax credit is $2,500 (providing a $500 Colorado tax credit). I am currently reviewing the mechanics of how this could work for my business owner clients.

Tax Planning Opportunities with 529 Plans – kids who are already in college (or close to it)

There are many tax planning strategies available when utilizing 529 plans for college savings. I wanted to highlight an opportunity here for those that are Colorado residents and already have college-age students.

Even if you have a child that is currently in college and not much time to benefit from potential tax-free growth of earnings in a 529 account, you can still get a tax benefit from utilizing a 529 plan. If you are a Colorado resident, you can open a Colorado 529 account, put the money you plan on using for your child’s qualified higher education expenses for the year into that 529 account, then withdraw the money shortly after to pay the education expenses. You get a Colorado tax deduction for the amounts you put into a CollegeInvest plan. The Colorado tax rate is currently 4.5%. You essentially give yourself a 4.5% discount on your higher education expenses for the year.

Example: You know you will need to spend $10,000 on your child’s tuition and room and board expenses in Fall 2023. You are a Colorado resident and have a Colorado tax liability every year. You deposit $10,000 into a new Colorado 529 account (with your child set as the beneficiary) in June 2023. You withdraw the same $10,000 from the 529 account in August 2023 to pay your child’s education expenses. You invested the $10,000 in a money market fund and there was no growth/loss during the time it was in the 529 account. You take a deduction for the $10,000 529 plan contribution on your 2023 Colorado tax return, reducing your Colorado tax liability by $450 ($10,000 x 4.5%).

Please note: if you utilize a 529 plan to pay for college expenses, you cannot count those same expenses towards other college tax benefits, such as the American Opportunity credit or Lifetime Learning credit, as that is considered “double-dipping.” Also, beginning 1/1/22, the annual Colorado tax deduction for 529 plan contributions is limited to $20,000 per taxpayer per beneficiary, or $30,000 per tax filing, per beneficiary for joint tax return filers.

These are just a few of the potential benefits you could get from using a 529 plan to save for college expenses. If you want to discuss whether saving to a 529 plan makes sense for your family, please reach out to me for a call.

*If you are not familiar with a 529 savings account, it is a type of investment account that is specifically designed to save for higher education expenses. You can put money into a 529 account and it grows tax-free, then the contribution + earnings can be taken out of the account tax-free if used for higher education expenses. Many states offer state tax benefits for contributing to their states 529 plan. Colorado provides for a state tax deduction for contributions made to a Colorado 529 plan. A great resource for 529 plan information is https://www.savingforcollege.com/

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In August, President Biden signed into law the 2022 Inflation Reduction Act (the Act). The Act includes several individual tax provisions – most notably an array of new tax credits relating to energy efficient homes, businesses, and vehicles. It also provides a three-year extension of the expanded Affordable Care Act health insurance subsidy.

The following is a summary of some of the Act’s key individual tax provisions.

Changes to the Electric Vehicle Tax Credit (Renamed Clean Vehicle Credit)

Currently, buyers of qualifying plug-in electric vehicles (EVs) are eligible for a nonrefundable tax credit of up to $7,500. The tax credit phases out once a vehicle manufacturer has sold 200,000 qualifying vehicles.

Changes to the Clean Vehicle Credit (previously Electric Vehicle Credit) after the Act include the following:

Still allows purchasers of new electric vehicles a federal tax credit up to $7,500
New limitations are put in place requiring some of the vehicle assembly to take place in North America to qualify for the credit.
For vehicles placed in service after 2023, qualifying vehicles do not include any vehicle with battery components that were manufactured or assembled by certain foreign entities.
For vehicles placed in service after 2024, qualifying vehicles do not include any vehicle in which applicable critical minerals in the vehicle’s battery are from certain foreign entities.
Certain higher-income taxpayers are not eligible for the credit. Specifically, no credit is allowed if the current year or preceding year’s modified adjusted gross income (AGI) exceeds $300,000 for married taxpayers ($225,000 in the case of head of household filers; $150,000 in the case of other filers).
Credits are only allowed for vehicles that have a manufacturer’s suggested retail price of no more than $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles.
Taxpayers are only allowed to claim the credit for one vehicle per year.
The 200,000 vehicle limit is eliminated.

Tax Planning Tip: If you are considering purchasing an electric vehicle and close to the adjusted gross income limits that will go into effect in 2023, you may want to consider accelerating your electric vehicle purchase(if possible) to take place before December 31, 2022 to avoid the income phaseouts.

Credit for Previously-Owned Clean Vehicles

The Act creates a new tax credit for buyers of previously owned qualified clean (plug-in electric and fuel cell) vehicles.

The maximum credit is $4,000 and is limited to 30 percent of the vehicle purchase price.
No credit is allowed for taxpayers above certain modified AGI thresholds. Married taxpayers filing a joint return cannot claim the credit if their modified AGI is above $150,000 ($112,500 in the case of head of household filers; $75,000 in the case of other filers). The taxpayer’s modified AGI is the lesser of modified AGI in the tax year or prior year.
Credits are only allowed for vehicles with a sale price of $25,000 or less with a model year that is at least two years earlier than the calendar year in which the vehicle is sold.
This credit can only be claimed for vehicles sold by a dealer and on the first transfer of a qualifying vehicle. Taxpayers can only claim this credit once every three years and must include the VIN on their tax return to claim a tax credit.

Changes to the Nonbusiness Energy Property Tax Credit (Renamed as the Energy Efficient Home Improvement Credit)

For years before 2022, a 10 percent tax credit, subject to a $500 per taxpayer lifetime limit, was available for qualified energy-efficiency improvements and expenditures for residential energy property on an individual’s primary residence.

The Act extends the credit through 2032. For property placed in services after 12/31/22, the credit rules are expanded to cover more types of improvements/property and to allow for higher credit amounts. Generally, the credit rate is increased to 30 percent, and there will be an annual (rather than lifetime) credit limit. The annual credit limit that will apply depends on the type of improvement you are making.

What are “qualified energy-efficiency improvements” and “expenditures for residential energy property?”

Qualified energy efficiency improvements include the following: Building envelope improvements including insulation, energy-efficient windows, and energy-efficient exterior doors.

Residential energy property includes the following: heat pumps, central air conditioners, water heaters, furnaces, and boilers, biomass stoves and boilers, certain energy-efficient oil furnaces and hot water boilers, cost to upgrade a panel if upgrade was to enable the installation and use of qualified energy efficiency improvements or residential energy property.

Annual limits

The total annual credit limit for qualified energy-efficiency improvements and residential energy property is generally $1,200 per year but a few specific types of improvements have lower or higher annual limits.

Exterior doors: Limited to $250 per door and $500 for all doors, per taxpayer per year.

Windows: Limited to $600 per taxpayer per year.

Residential energy property: Limited to $600 per taxpayer per year (but see following exception).

Electric or natural gas heat pump water heaters, electric or natural gas heat pumps and biomass stoves and boilers: Maximum annual credit increased to $2,000

Examples

The mix of different maximum credit amounts can be confusing. Here are a few examples to illustrate how some of the credit amounts work.

Example #1: You spend $3,000 on qualifying new windows in 2023. The potential credit is calculated at 30% of $3,000 or $900. The credit allowed is the lesser of 30% of your cost or the max windows credit amount of $600. Your credit is $600.

Example #2: Same fact pattern as Example #1, except you also purchase a new exterior door costing $800. Your credit allowed for the door is $240 (the lesser of 30% of your door cost ($800 x 30% = $240) or $250. Your credit allowed for the windows is $600 (as calculated in Example #1). Your total credit is $840.

Example #3: Same fact pattern as Example #2, except you also spend $2,000 on insulation in 2023. Your potential credit for the insulation is $600 ($2,000 x 30%). Your potential credit for the windows is $600 (as calculated above) and your potential credit for the door is $240 (as calculated above). Your total potential credit is $1,440. The annual maximum credit is $1,200 so your total credit allowed is $1,200.

Tax Planning Tip: The expanded credit amounts don’t go into effect until after 12/31/22. If you are planning on making any of these home improvements, you may want to wait until 2023 to take advantage of the larger credit amounts.

Tax Planning Tip: Beginning in 2023, consider splitting projects involving these types of improvements over more than one tax year if it looks like the cost will push you over the annual credit limit. Because of the new annual, rather than lifetime, credit limits, implementing these improvements over more than one year may allow you to claim higher tax credit amounts.

Restoration of 30 Percent Residential Energy Efficient Tax Credit (Renamed the Residential Clean Energy Credit)

A tax credit is currently provided for the purchase of solar electric property, solar water heating property, fuel cells, geothermal heat pump property, small wind energy property, and qualified biomass fuel property. Initially, the credit rate was 30 percent through 2019. It was then reduced to 26 percent through 2022, and was scheduled to be reduced to 22 percent in 2023 before expiring at the end of that year.

The Act extends the credit through December 31, 2034, restoring the 30 percent credit rate, beginning in 2022 through 2032, and then reducing the credit rate to 26 percent in 2033 and 22 percent in 2034. Qualified battery storage technology is also added to the list of eligible property.

Tax Planning Tip: The average home solar panel installation costs between $15,000 – $25,000. At a federal credit rate of 30%, this equates to federal tax credits ranging from $5,000 – $7,500. If you plan on claiming the solar credit and typically receive a refund with your federal tax filing, you may want to consider reducing the amount of federal income tax withheld from wages and other sources of income. This would allow you to hold onto your cash to use for other purposes sooner rather than receiving a large refund at tax filing time. You would need to change your tax withholding back to normal in the following year.

Alternative Fuel Refueling Property Credit (for Electric Vehicle Charging Stations)

Through 2021, taxpayers were allowed a tax credit for the cost of any qualified alternative fuel vehicle refueling property installed at a taxpayer’s principal residence. The credit was equal to 30 percent of these costs, limited to $30,000 for businesses at each separate location with qualifying property, and $1,000 for residences. The Act extends this credit through December 31, 2032, and makes certain additional modifications.

Extension of Health Insurance Subsidy

A health insurance subsidy is available through a premium assistance credit for eligible individuals and families who purchase health insurance through Exchanges offered under the Patient Protection and Affordable Care Act (PPACA). The premium assistance credit is refundable and payable in advance directly to the insurer on the Exchange. Individuals with incomes exceeding 400 percent of the poverty level ($54,360 for a one-person household in 2022) are normally not eligible for these subsidies. However, legislation passed in 2021 eliminated this limitation for 2021 and 2022 so that anyone can qualify for the subsidy. That legislation also limited the percentage of a person’s income paid for health insurance under a PPACA plan to 8.5 percent of income. The Act extends these provisions through 2025.

Tax Planning Tip: If you purchase health insurance through the Marketplace, you should pay careful attention to the amount of advance premium assistance credit (if any) reducing your monthly insurance cost. For 2020 and 2021, Congress had eliminated for some taxpayers the requirement to pay back excess advance premium assistance credits with your annual tax filing. Although the Inflation Reduction Act extended potential subsidies for people making income over 400% of the poverty level, it did NOT extend the provision to eliminate repayment of excess subsidies/credits.

If you would like to discuss how the Inflation Reduction Act specifically impacts your taxes, please reach out to me for a call.

Month: September 2022

Colorado 529 Plan – CollegeInvest First Step Program and more

Inflation Reduction Act Individual Tax Provisions