Don’t Fear Your 2022 Taxes
The last thing most of us want to think about is 2022 taxes. However, now is the ideal time to focus on tax planning for the remainder of 2022, especially as many of the tax-friendly COVID-19 pandemic provisions enacted by Congress have expired or changed in a manner that could impact your 2022 taxes. As part of your tax planning, we give you an update on pass through entity (PTE) taxes that can enable qualified owners to effectively get around the federal $10,000 limit on deducting state and local taxes. We encourage you to make an appointment with us to discuss your 2022 tax planning opportunities now.
In this newsletter we detail changes to the R&D Tax Credit as well as the revamped electric vehicle tax credit and other energy tax credits in newly passed legislation.
Also included this month, common questions regarding Student Loan Forgiveness.
As always, Moskowitz LLP aims to resolve tax problems, strength bottom lines, and assist wealth building and preservation. We accomplish this by utilizing the tax code to its fullest and providing legal services, tax accounting and return preparation, and tax and estate planning services to individuals and businesses.
September 15, 2022
– Filing deadline for extended 2021 calendar-year S corporation and partnership tax returns
– 3rd quarter installment of 2022 estimated income tax is due for individuals, calendar-year corporations and calendar-year trusts & estates.
September 23, 2022
– Last Day to get Moskowitz all tax information for Individual Income Tax Returns due October 15, 2022
October 17, 2022
– Filing deadline for extended 2021 individual and C corporation tax returns
- Reminder: Third Quarter Estimated Taxes Due
- Pass-Through Entity Tax Election
- Legislative Update: R&D Tax Credit Increase
- Legislative Update: Inflation Reduction Act (IRA) ~ New Electric Vehicle and Other Energy Credit Provisions
- Student Loan Forgiveness Q&A
- Moskowitz LLP Resources for You
Reminder: Third Quarter Estimated Taxes Due
Now is the time to make your estimated tax payment.
If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.
Due date: Thursday, Sept. 15, 2022
Remember, you are required to withhold at least 90 percent of your current tax obligation or 100 percent of last year’s obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:
- Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.
- W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
- Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.
- Don’t forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you’re required to do so for your federal taxes.
**If your income is over $150,000 ($75,000 if married filing separately), you must pay 110 percent of last year’s tax obligation to be safe from an underpayment penalty.**
Pass-Through Entity Tax Election
This rule could save you thousands of dollars.
If your pass-through business is located in one of these states, you may be able to save thousands of dollars in federal income taxes by electing to have your PTE pay the state tax due on its income at the entity level instead of you paying your share of such taxes on your personal return. Reason: When your PTE pays such taxes, it may deduct them in full because it is not subject to the individual $10,000 SALT limit.
Unfortunately, every state’s PTE tax regime is different. Before your PTE makes a PTE tax election, all its owners must understand the issues involved. These include:
- Is your PTE eligible for a PTE tax election?
- What percentage of ownership is required to make the election?
- What’s the deadline for the election?
- Are estimated PTE taxes due?
- How much is the PTE tax?
- Does your state give electing PTE owners a tax credit or income exclusion?
- How are non-resident PTE owners treated?
Note that the state of California has been sending erroneous refunds to taxpayers who made PTE payments before the June 15th deadline. Please watch for anything coming from the Franchise Tax Board. They have established a procedure for returning the funds in a way that preserves the election. If its not done correctly, you may lose out on the ability to make the PTE election for 2022.
Legislative Update: R&D Tax Credit Increase
You research. You develop. Why not pay less payroll tax?
Research and Development (R&D) tax credits are a permanent federal (also offered by most States) tax incentive designed to stimulate innovation, growth, and competitiveness. This R&D tax credit serves to maximize a company’s cash flow through tax savings for conducting innovative activities.
Less than one-third of eligible companies realize they qualify for the R&D Tax Credit.
Research Credit – The legislation increases the limitation on the ability of small businesses to claim the research credit against payroll taxes from $250,000 to $500,000.
Legislative Update: Energy Efficient Building Incentives 179D/45L
Legislative Update: Inflation Reduction Act (IRA) ~ New Electric Vehicle and Other Energy Credit Provisions
Tax incentives for purchasing clean (electric) vehicles and installing high efficiency home improvements are some of the featured provisions in the recently-passed Inflation Reduction Act (IRA). Here’s a closer look at some of the bill’s tax provisions regarding the new incentives.
Clean Vehicle Credit (formerly Plug-In Electric Vehicle Credit)
Here is a summary of the details surrounding the new Clean Vehicle Credit:
- The tax credit of up to $7,500 for electric vehicles (EVs) is extended for 10 years until December 2032.
- Starting in 2023, used cars now qualify for up to a $4,000 tax credit.
- Starting in 2024, you can take the credit as a discount at the time you purchase the vehicle instead of waiting to file your tax return.
- In the past, if a manufacturer had produced at least 200,000 EVs, you could no longer qualify for the tax credit if purchasing a vehicle from that manufacturer. The new bill removes this 200,000 vehicle cap starting in 2023.
On the other hand, there are significantly more hurdles you’ll have to overcome to qualify for the new Clean Vehicle Credit:
- New clean cars must have a manufacturer’s suggested retail price (MSRP) of no more than $55,000.
- New clean vans, pickup trucks, and SUVs must have an MSRP of no more than $80,000.
- Used clean vehicles must cost no more than $25,000.
- For a new clean vehicle, your adjusted gross income must be less than $150,000 if single, $225,000 if head of household, or $300,000 if married.
- For a used clean vehicle, your adjusted gross income must be less than $75,000 if single, $112,500 if head of household, or $150,000 if married.
Domestic production hurdle
- The final assembly of a new clean vehicle must occur in North America as of August 16, 2022.
- Starting in 2023, at least 40% of critical battery minerals and 50% of battery components must be recycled, mined, or manufactured in the U.S.
- Many automakers are unsure whether they will be able to meet this criteria as the new law is currently written.
What you can do
- Wait until 2023 to buy Tesla and GM vehicles. Because Tesla and General Motors have both crossed the 200,000 electronic vehicle threshold, any Tesla or GM vehicle purchased in 2022 won’t qualify for the tax credit. Starting in 2023, certain Tesla and GM vehicles will once again qualify for the credit once the 200,000 limit is removed.
- overnment to release further guidance. There are still many unanswered questions about how the new Clean Vehicle Credit will be implemented. The federal government plans to release further guidance by the end of the year that hopefully answers some of these questions.
Other Tax-Related Provisions
- Qualifying high efficiency home improvements now qualify for an annual $1,200 credit, up from a $500 maximum lifetime credit.
- Energy efficient heat pumps, heat pump water heaters, central air conditioners, wood stoves, and natural gas or oil furnaces or boilers qualify for a $2,000 credit.
What you can do
- Look for the details. Prior to purchasing new high efficient home improvements, double check how the new credit will apply to your purchase.
- Check with manufacturers. Most manufacturers are motivated to understand the new program and could be a good resource to see how they apply to your situation.
There will be more details on how to obtain these credits in the future. So stay alert and check before making any purchase decisions if you are expecting to take any of these new energy saving credits.
Student Loan Forgiveness Q&A
While there may be legal and Congressional challenges around the recent presidential executive order, here are some questions and answers about what is known so far about the announced student loan forgiveness program.
Can the President forgive this debt?
Who knows how this will play out, but maybe not. Only Congress has spending authority. And the forgiveness of debt is considered income in the eyes of the IRS. So to avoid any long-standing legal battle, Congress may need to authorize this estimated $1 trillion dollar program. Whether it does is up for debate.
If approved, who qualifies for the forgiveness program?
Here’s a checklist of qualifications in the executive order:
- Loan Type. You have student loans that are held by the U.S. Department of Education (DoE), including Pell Grants, Federal Family Education Loans, and Direct Loans such as Parent PLUS and Grad PLUS loans. Certain loans from the Federal Perkins Loan Program may be excluded. All private student loans are also excluded.
- Loan Issue Date. Student loans taken out after June 30, 2022 are not eligible for forgiveness.
- Income Threshold. Your income does not exceed $125,000 if single and $250,000 if married based on your 2020 or 2021 federal tax return.*
What are the limits?
- $20,000. Recipients of a Pell Grant can have up to $20,000 in student loan forgiveness.
- $10,000. For non-Pell Grant loans, the maximum student loan forgiveness is $10,000.
Is the forgiven student loan taxable?
- Federal Level. Per the executive order, forgiven student loans will not be considered taxable income on federal tax returns. The approach the executive order takes is by using the American Rescue Plan that prevents taxation on student loans forgiven through 2025.
- State Level. While many states follow the federal law that excludes student loan forgiveness from being considered taxable income, several states currently do not conform to federal law. Details are being worked out in these states to try and keep student loan forgiveness from being considered taxable income.
What you need to do
Stay alert to any twists and turns regarding challenges to this executive order. In the meantime:
- Watch for the forgiveness application. An application for student loan forgiveness on the Department of Education’s website, ed.gov, will be the next step. There may be exclusions to this application requirement, with many borrowers potentially receiving automatic forgiveness if the Department of Education already has your income data.
- Double-check your loan balance. Take a screen shot of your loan balance the day you submit your forgiveness application and compare it to your balance after the forgiveness is eventually applied to make sure the forgiveness is properly applied to your account.
There are still lots of unanswered questions about this student loan forgiveness program, including whether it is even legal. So stay tuned for future updates.
*NOTE: While the Department of Education typically uses your adjusted gross income (AGI) number when determining eligibility for other loan programs, the White House did not confirm whether AGI will be used to determine the $125,000 and $250,000 income thresholds.
Moskowitz LLP Resources for You
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