Monthly Archives: February 2023

Are You Caring for a Disabled Family Member? Read This.

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Article Highlights:

Caring for Disabled Family Members
Qualified Medicaid Waiver Payments
Exclusion Qualifications
Mandatory Exclusion
Earned Income
Earned Income Tax Credit
Tax Court Ruling

Many taxpayers prefer to care for ill or disabled family members in their homes as opposed to placing them in nursing homes, but doing this can be expensive, time-consuming, and exhausting. The government also recognizes home care as a means of reducing the government’s costs in terms of caring for individuals who otherwise would be institutionalized (because they require the type of care that is normally provided in a hospital, nursing facility, or intermediate care facility). To promote home care and reduce the government’s institutional care expenses, Medicaid (through state agencies) pays home caregivers a small amount of compensation, referred to as a Medicaid waiver payment, to care for an individual in the care provider’s home. Originally the IRS took the position that these payments were taxable income to the caregiver. Back in 2014, the IRS changed its position and announced that, if the care met certain requirements, the compensation would be excludable and treated in the same manner as excludable difficulty-of-care payments under the foster care payments rule. This is the case even when the caregiver and the individual being cared for are related. The compensation exclusion applies if the following requirements are met:

The compensation must be required due to a physical, mental, or emotional handicap with respect to which the State has determined that there is a need for additional compensation.
The care must be provided in the care provider’s home. The “provider’s home” may be the care recipient’s home if the care provider resides there and regularly performs the routines of the provider’s private life, such as sharing meals and holidays with family. In contrast a care provider who sleeps at the care recipient’s home several nights a week but on weekends and holidays resides with his or her own family in a separate home would not be providing the care in the care provider’s home and would not qualify to exclude the Medicaid waiver payments received.
The payments must be designated as compensation for qualified foster care or difficulty of care.
To be excludable, the care payments are limited to a maximum of five individuals aged 19 and older or ten individuals aged 18 and younger.

Since these payments are treated the same as qualified foster care difficulty-of-care payments, and since compensation for qualified foster care payments is mandatorily excluded, Medicaid waiver payments are also mandatorily excluded. That is, the care provider receiving these payments may not choose to include them in income. When the IRS originally ruled that the compensation was excludable from income that meant it was no longer earned income and thus lower-income caregivers who were previously able to qualify for the earned income tax credit (EITC) based on the compensation would no longer be eligible for EITC. The EITC is a refundable federal tax credit for lower-income taxpayers with earned income. The amount of credit is based on income and increases based on the number of children that the taxpayer has (qualified children include those under age 19 and full-time students under the age of 24; there is no age limit when the child is permanently and totally disabled). Lucky for all Medicaid waiver payment recipients, one recipient took the IRS to Tax Court over the earned income issue. The taxpayers in that court case received payments under a state Medicaid waiver program for providing care to their adult disabled children in the family home and excluded the Medicaid waiver payments from income but still treated them as earned income when computing the EITC, disregarding the IRS’s position that excluded payments were no longer earned income. The IRS subsequently disallowed the credit, and the taxpayers filed a timely Tax Court petition. The Tax Court held that the IRS could not reclassify the taxpayer’s Medicaid waiver payment to remove a statutory tax benefit provided by Congress. The IRS subsequently conceded to the court ruling so that even though the compensation is excluded from income it still retains it character as earned income and is to be used to determine the EITC if a taxpayer otherwise qualifies. As you can see, the impact of the exclusion can be quite different depending upon your circumstances. If you are receiving Medicaid waiver payments and have not yet dealt with the exclusion, please call this office to see how excluding these payments might affect you.

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Many Taxpayers Will See Smaller Refunds This Year

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Article Highlights:

Child Tax Credit
Dependent Care Benefits
Recovery Rebates
Employee Retention Credit

Congress has for years used the tax return as a means of providing benefits to taxpayers in need and incentives to stimulate activities in business, as well as addressing environmental issues. So when COVID-19 hit, Congress and many state governments provided tax benefits to help citizens through the pandemic. Because the COVID pandemic-related benefits have come to an end, your tax refunds may be smaller this year, and substantially smaller for many. The following is a rundown of some areas where decreases in federal tax benefits will affect taxpayers’ 2022 tax refunds.
Child Tax Credit:

2021 – Taxpayers with children enjoyed an enhanced and refundable tax credit of $3,000 per child under the age of 18 ($3,600 if under age 6) per child in 2021.
2022 – The credit has reverted to 2020 levels and the maximum credit for 2022 is $2,000 per qualifying child, of which the maximum refundable amount is $1,500 per child in certain situations. In addition, the credit only applies to children under the age of 17.

Non-refundable tax credits can only be used to offset tax liability and any excess is lost. On the other hand, a refundable credit offsets tax liability and any excess is refundable.
In addition, the child tax credit has always phased out for higher income taxpayers. For 2021 the phaseout thresholds were substantially increased as illustrated in the table. However, that increase was for 2021 only and the thresholds have reverted to 2020 levels for 2022.

CHILD & DEPENDENT TAX CREDITS PHASEOUT THRESHOLDS

Filing Status
2022
2021

Married joint
$110,000
$400,000

Married separate
$55,000
$200,000

All others
$75,000
$200,000

Dependent Care Benefits: The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit is a percentage of the dependent care expenses incurred, but those expenses are limited to specific amounts and the taxpayer’s income from working. The credit percentage also declines for higher income taxpayers.
2021 – The credit was fully refundable, and the credit was a flat 50% of the allowable expenses up to $8,000 for one and $16,000 for two or more qualified individuals. Thus the credit could be as much $4,000 for one and $8,000 for two or more qualified individuals.The 50% credit rate began to phase out when the taxpayer’s AGI reached $125,000, but the rate wasn’t reduced below 20%.
2022 – The credit is not refundable, and the credit rate ranges from a high of 35% to a low of 20% (see table) of the allowable expenses up to $3,000 for one and $6,000 for two or more qualified individuals.

AGI Adjusted Applicable Percentage (Other Than 2021)

AGIOver

But NotOver

ApplicablePercent

AGIOver

But NotOver

ApplicablePercent

0
15,000
35
29,000
31,000
27

15,000
17,000
34
31,000
33,000
26

17,000
19,000
33
33,000
35,000
25

19,000
21,000
32
35,000
37,000
24

21,000
23,000
31
37,000
39,000
23

23,000
25,000
30
39,000
41,000
22

25,000
27,000
29
41,000
43,000
21

27,000
29,000
28
43,000
No Limit
20

Recovery Rebates – As a means of providing financial assistance to individuals during the COVID pandemic, Congress authorized Recovery Rebate Credits (also referred to as economic impact payments) for the 2020 and 2021 tax years.

2021 – The rebates, which generally were issued by the federal government during the year but which may have been claimed on the 2021 tax return, were: o $1,400 ($2,800 for joint filers)o $1,400 per dependent
2022 – There were no rebates

Employee Retention Credit – As the title implies, this is a credit whose purpose was to help employers retain employees on payroll even though the employer’s business was in decline because of COVID.

2021 – The payroll credit was 70%of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups.
2022 – There is no longer a credit for years after 2021.

As you can see there have been some significant reductions of tax benefits that can have a substantial impact on your refund for 2022. Please contact this office if you have questions or would like to adjust your withholding to alter your refund for 2023.

Posted in Tax

Tax Benefits for Grandchildren

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Article Highlights:

Financially Assisting Grandchildren
College savings
Education savings
Retirement accounts
Medical expenses

If you are a grandparent there are several things you can do to teach your grandchildren financial responsibility and set aside money for their future education and retirement. Before we get into actual suggestions, it is important that you understand the gift tax rules. You can give anyone, every year, an amount up to the annual gift tax exclusion. The gift tax exclusion is inflation-adjusted and is currently $17,000, which means that, in 2023, you can give any number of recipients up to $17,000. Thus, you can give each grandchild $17,000per year; and, if you are married, both you and your spouse can each give $17,000 for a total of $34,000 per year. Gifts in excess of $17,000 per donee can certainly be made, but doing so will mean the grandparent must file a Gift Tax Return (Form 709) and pay gift tax on taxable gifts in excess of a lifetime gift and estate tax exclusion $12.92 Million for 2023).
Of course, just handing out money to your grandchildren will not teach financial responsibility or meet specific goals you might have in mind for the money. The following are some suggestions.
Savings for College: The tax code allows taxpayers to put away large amounts of money limited only by the contributor’s gift tax concerns and the contribution limits of the intended state plan. There are no income or age limitations for these plans, often referred to as Sec. 529 Plans (the tax code number) or Qualified Tuition Plans. The maximum amount – per beneficiary – that can be contributed is based on the projected cost of a college education and will vary among state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. These plans allow for tax-free accumulation provided the funds are used for qualified college expenses. Thus, a grandparent can currently contribute up to $17,000 per year to a Sec. 529 Plan. There are also special provisions that permit 5 years’ worth of contributions up front (this requires filing gift tax returns).
Savings for Education: Funds from a Sec. 529 plan can only be used for college. Coverdell Education Accounts also provide tax-free accumulation like Sec. 529 plans; but, unlike Sec. 529 Plans, the funds can be used for education beginning with kindergarten and continuing through college. So, you might want to consider contributing the first $2,000 (Coverdell annual contribution limit) to a Coverdell account. One downside to a Coverdell account is that it becomes the child’s account to do with as the child wishes when the child reaches the age of majority (age varies by state); while, with the Sec. 529 plan, the contributor maintains control of the plan’s distributions.
Roth Retirement Account: You may have a teenage grandchild who has a part-time job. To the extent the child has earnings from work, you – the grandparent – could fund an IRA for him or her. Generally, a child with a part time job will benefit very little, if any, from a traditional IRA deduction, so a Roth IRA is generally a better choice. Any contribution for 2023 would be limited to the lesser of $6,500 or the child’s earned income. A Roth IRA accumulates earnings tax-free and distributions are tax-free at retirement age. The amount of the IRA contribution you pay is considered a gift to the grandchild, and it goes against the annual gift tax exclusion amount. For example, if your grandchild had $3,500 of wage income in 2023 and you funded $3,500 into an IRA for the grandchild, the remaining balance of the $17,000 annual exclusion would be $13,500. If you decided to buy your grandchild a $15,000 used car later the same year, you would be over the annual exclusion amount by $1,500 and would need to file a gift tax return. You would likely not owe any gift tax unless you’ve previously made large gifts, but the $1,500 does reduce your lifetime gift and estate tax exclusion.
Tuition and Medical Gift Exclusion: In addition to the annual exclusion, a grandparent may make gifts that are totally excluded from the gift tax in the following circumstances:

Payments made directly (Sec. 529 plans are not direct) to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board. This could also create a tax credit of up to $2,500 for the individual who claims your grandchild as a dependent.
Payments made directly to any person or entity providing medical care for the donee.

In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant. Grandparents interested in reducing the value of their estate should strongly consider these gifts.
Establish Trusts: Although a somewhat more complicated possibility and one that will require the services of a trust attorney, there are a variety of trusts that can be established to make future distributions to a grandchild based upon the grandchild’s future achievements, such as completing his or her college education, holding a job, overcoming an addiction, etc.
Although none of these suggestions provides any current tax benefits for grandparents other than reducing the value of their future estate, they will help grandchildren get off to a good start in life. Please call this office for further details.

Wow! You Can Now Get a Tax Credit For Buying a Used Electric Vehicle

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Article Highlights:

Income Limit
Credit Amount
Previously Owned Clean Vehicle
Qualified Sale
Qualified Buyer
Dealer Report
Transfer of Credit to the Dealer
Vehicle Identification Number
Non-refundable Credit

2023 brings with it a whole new set of rules related to qualifying for a tax credit for purchasing a used electric vehicle. This is the first time that used electric vehicles have qualified for a tax credit, and although considerably less than the credit for purchasing a new electric vehicle, it does provide an incentive for lower income taxpayers to acquire an electric vehicle. However, this new credit – officially termed the Previously-Owned Clean Vehicle Credit in the tax code – also comes with some rules that limit the vehicles that qualify, and essentially bars the credit to higher income taxpayers. Here are the details.
Income Limit – Congress chose to limit this credit to lower income individuals. Thus,no credit is allowed for any tax year if the lesser of the individual’s modified adjusted gross income (MAGI) for the:

Current tax year, or
The preceding tax year

exceeds the threshold amount as indicated below. There is no phaseout and just one dollar over the limit means no credit will be allowed. Thus, Congress has essentially eliminated the credit for higher income taxpayers.

Married Filing Joint or Surviving Spouse  $150,000
Head of Household  $112,500
Others $75,000

MAGI is the buyer’s adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.
Credit Amount – A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 and before 2033 is allowed an income tax credit equal to the lesser of:

$4,000 or
30% of the vehicle’s sale price.

The credit applies to the year that the taxpayer takes delivery (referred to in tax lingo as the year the “vehicle is placed in service”).
Previously Owned Clean Vehicle – A previously owned clean vehicle is a motor vehicle:

The model year of which is at least two years earlier than the calendar year in which the taxpayer acquires it,
Original use of which starts with a person other than the taxpayer,
Is acquired in a qualified sale, and
Generally meets the requirements applicable to vehicles eligible for the clean vehicle credit for new vehicles (must be made by a qualified manufacturer, be treated as a motor vehicle under the Clean Air Act, have a GVWR of less than 14,000 pounds, and have a rechargeable battery with a capacity of at least seven kilowatt hours) or is a clean fuel-cell vehicle with a gross weight rating of less than 14,000 pounds.
The IRS provides a list of qualifying vehicles.

Note that a qualified used clean vehicle isn’t required to satisfy the domestic assembly and mineral content of batteries requirements that apply to a new clean vehicle.
Qualified Sale – A qualified sale is a sale of a previously owned motor vehicle:

By a dealer,
For a price of $25,000 or less, and
Which is the first transfer after August 16, 2022 to a qualified buyer other than the original buyer of the vehicle.

Qualified Buyer- A qualified buyer is an individual who:

Purchases the vehicle for use and not for resale,
Meets the MAGI limits previously discussed,
Is not a dependent of another taxpayer*, and
Has not been allowed a credit for a previously owned clean vehicle during the three-year period ending on the sale date.* Makes no difference if the buyer chooses not to claim the dependent, since the dependency deduction is still “allowable” to the buyer.

Dealer Report – A dealer must provide the following information on a report to the taxpayer and to the IRS:

Name and taxpayer identification number of the dealer,
Name and taxpayer identification number of the taxpayer,
Vehicle identification number of the vehicle,
Battery capacity of the vehicle,
The date of the sale and the sales price of the vehicle,
Maximum credit allowable for the vehicle being sold,
For sales after December 31, 2023, the amount of any transfer credit applied to the purchase, and
A declaration under penalties of perjury from the dealer.

Transfer of Credit to the Dealer – After 2023, the taxpayer purchasing the vehicle, on or before the purchase date, can elect to transfer the previously-owned clean vehicle credit to the dealer from whom the vehicle is being purchased in return for a reduction in purchase price equal to the credit amount.
A buyer who has elected to transfer the credit for a used clean vehicle to the dealer and has received a payment from the dealer in return, but whose MAGI exceeds the applicable limit, is required to recapture the amount of the payment on their tax return for the year the vehicle was placed in service.
The vehicle identification number of the previously owned clean vehicle is required to be included on Form 8936 (the form the buyer uses to claim the credit).
Be aware the credit is nonrefundable and can only be used to the extent of an individual’s tax liability for the year of the credit and any excess credit will be lost.
If you have questions about these new rules of the used clean vehicle credit, please give this office a call.