Author: lenfertcpa@gmail.com

Here’s a look at some tax planning considerations for individuals as we approach year-end.

2022 Tax Law Changes

There have been few major tax law changes from 2021 to 2022.  One item of note is that several tax credits will return to their pre-pandemic levels, which may result in smaller refunds or balances due with 2022 federal tax return filing.  Changes include amounts for the Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit.

• Those who got $3,600 or $3,000 per dependent in 2021 for the CTC will, if eligible, get $2,000 for the 2022 tax year.
• For the EITC, eligible taxpayers with no children who received roughly $1,500 in 2021 will now get $500 in 2022.
• The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.

Retirement planning

There’s still time before the end of 2022 to make tax-saving moves with your retirement plans.

• If you have earned income, consider maximizing contributions to retirement plans.  Remember that for traditional and Roth IRAs, and most self-employment retirement plans, you actually have until the tax filing deadline (and in some cases the extended deadline) to make contributions for 2022.

• Consider Roth conversions – Roth conversions are a strategy where you move money from pre-tax retirement accounts over to Roth retirement accounts. You pay tax on the transfer of the money now, but it then grows tax-free and can be withdrawn in retirement tax-free. This can be beneficial when you think your current tax rate is lower than or equal to your future expected retirement tax rate. Weigh the benefits of converting Traditional IRA to a Roth IRA to lock in lower tax rates on some pre-tax retirement accounts. 
  • Remember that Roth Conversions can no longer be recharacterized so there’s no reversing once executed.
  • Keep in mind that Roth conversions will be more beneficial when the tax can be paid by funds outside of the IRA.
  • Remember that all IRA balances are included in the tax calculation of the conversion limiting the ability to only convert after-tax amounts.

• If you have reached age 72, be sure to take your required minimum distributions from your retirement plans before year end.  Some beneficiaries of inherited IRAs may also need to take a required minimum distribution before year end from their inherited IRAs.  

Investment tax strategies – see this post with specific portfolio tax strategies.

Charitable contribution planning

If you are planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes.  However, keep in mind that for most charitable giving strategies, you need to itemize deductions on your federal tax return to obtain a tax benefit.

• Consider donation of appreciated assets that have been held for more than one year, rather than cash. 
• Consider opening and funding a Donor Advised Fund (DAF) as it allows for a tax-deductible gift in the current year and also provides the ability to dole out those funds to charities over multiple years.
• Qualified Charitable Distributions (QCDs) are another option for those over 70.5 and especially for those who don’t typically itemize on their tax returns.

Last year, individuals who did not itemize their deductions could take a deduction of up to $300 ($600 for joint filers). This opportunity is currently not available for tax year 2022 however there is some speculation that Congress may make this available for 2022 via an extenders package that would be passed in December 2022. Also, some states allow for a charitable contribution deduction even if you don’t itemize on your federal return (for example, Colorado allows for a charitable deduction when total annual donations exceed $500). It is still worth tracking your charitable contributions for 2022 even if you don’t itemize deductions on your federal tax return.

Education expense planning

If you are paying college expenses, you may want to consider before year end if you will qualify for the American Opportunity Tax Credit (AOTC).   This is a federal tax credit available for the first four years of higher education.  It is a 100% tax credit for the first $2,000 of qualifying college expenses, and an additional 25% credit on the next $2,000 of expenses, for a maximum credit of $2,500.  The student must be enrolled at least half-time in a degree program.

If you file married filing jointly, your ability to claim the AOTC completely phases out once your modified adjusted gross income reaches $160,000.  For taxpayers who file, single, head of household or qualifying widow/er, it phases out at $90,000.  Taxpayers who file married filing separately are not eligible to claim the AOTC.

College expenses paid with funds from 529 plans do not qualify for the AOTC.   If you are eligible to claim the AOTC, you will want to factor it in when determining how to fund college expenses (via 529 savings, personal funds, student loan, grandparent gifts, etc.).

Estate and Gift tax planning

Here are some estate and gift tax planning items to consider before year end.

• Make use of annual exclusion gifts.  Generally, you are able to give up to $16,000 per donee and $32,000 per married couple without having a gift tax return filing requirement.
• Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses. (Payments made directly to educational institutions and medical providers are not subject to the $16,000 annual gift limitation).
• Consider gifting to a 529 plan by year-end if saving for a child’s or grandchild’s education. Many states offer tax deductions for residents contributing to their state programs.
• Consider gifting up to 5 years of the annual exclusion amount to an individual’s 529 plan and filing a gift tax return, electing to treat it as if it were made evenly over a 5-year period.

If you need help determining whether a tax planning strategy is right for your finances, please reach out to me.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

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/

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

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.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

If you are the owner of an LLC or corporation, you’ve probably received a few letters that look like this.

The letters look very official and tell you that you need to file your annual periodic report for your entity with the Secretary of State. However if you read the fine print, you will see that these letters do NOT come from the Secretary of State; they come from a third-party that is offering to file your annual periodic report for you.

(The example in this post if for a Colorado entity; however there are similar letters sent out in other states that offer this unnecessary “service.”)

All of the information pre-filled on the report is from public records on the Secretary of State’s website. You typically do NOT need to use a third-party to file your annual report. In this example, the third-party service is charging a $75 fee, which includes the $10 Secretary of State fee. In Colorado, the annual report can easily be filed online through the Colorado Secretary of State website. So if you use these service, you are basically paying $65 for something that will probably take you more time and energy then just going to the Secretary of State website and filing the report yourself.

You can find instructions here on how to file your Colorado annual report yourself: https://www.sos.state.co.us/pubs/business/FAQs/reports.html

You can also sign up on the Colorado Secretary of State’s website to receive email notifications when your annual report is due.

If you receive this type of correspondence and need help determining if it is legitimate, you may want to consult with your attorney or tax professional.