Don’t Overlook Tax Credits

Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons, including as a form of assistance for lower-income taxpayers, to stimulate employment, and to stimulate certain investments, among other things.

Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. The following is a summary of some of the tax credits available to individual taxpayers:

Childcare Credit – Parents who work or are looking for work often must arrange for care of their children during working hours or while searching for work. If this describes your situation and your children requiring care are under 13 years of age, you may qualify for a childcare tax credit.

The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower-income taxpayers and the lower percentages applying to higher-income taxpayers.

Applicable Percentage of AGI for the Childcare Credit
AGI Over But Not Over Applicable Percent AGI Over But Not Over Applicable Percent
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

The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.

As an example, say your adjusted gross income (AGI) is between $33,000 and $35,000. Your credit percentage would be 25%. If you paid childcare expenses of $4,000 for two children under the age of 13, your tax credit would be $1,000 ($4,000 x 25%). If your tax for the year was $5,000, the credit would reduce that tax to $4,000. On the other hand, if your tax for the year was $800, the credit would reduce your tax to zero, and the $200 excess credit would be lost.

This credit also applies when a taxpayer or spouse is disabled or a full-time student, in which case special “earned income” allowances are provided for months when the taxpayer or spouse is disabled or a full-time student. Please call this office for additional details if this situation applies in your case.

Earned Income Tax Credit (EITC) – Congress established the EITC as an income supplement for working individuals in lower-paying employment. If you qualify, it could be worth as much as $6,431 in 2018. It is a refundable credit.

The EITC is based on the amount of your earned income (income from work for wages and/or self-employment) and whether there are qualifying children in your household. Qualifying children are those who live with you for over half the year, are related, and are under the age of 19 or a full-time student under the age of 24. The credit increases as your earned income increases. The table below shows the earned income at which the maximum credit is achieved for 2018.

Qualifying Children Earned Income  Maximum Credit
None 6,780 $519
1 $10,180 $3,461
2 $14,290 $5,716
3 or more $14,290 $6,431

The credit amount phases out after reaching the maximum based on filing status and number of qualifying children. The 2018 phase-out ranges are shown in the table below.

Qualifying Children

Filing Status Phase-out Range
None Married Filing Joint $14,170–20,950
Others $8,490–15,270
1 Married Filing Joint $24,350–46,010
Others $18,660–40,320
2 Married Filing Joint $24,350–51,492
Others $18,660–45,802
3 or more Married Filing Joint $24,350–54,884
Others $18,660–49,194

In addition, there are some qualification requirements: you, your spouse (if married and filing jointly), and each qualifying child must have a valid Social Security number, and you cannot use the filing status married filing separately. You cannot be a qualifying child of another person, your investment income for the year cannot exceed $3,500 (2018), and you cannot exclude earned income from working abroad. If you do not have a qualifying child, you must be at least age 25 but under 65 at the end of the year.

Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it, simply because they don’t understand the criteria. If you qualified for but failed to claim the credit on your return for 2015, 2016, and/or 2017, you can still claim it for those years by filing an amended return or an original return, if you have not previously filed. Please call for assistance.

Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include in their earned income all nontaxable combat pay they received for the year.

Child & Dependent Tax Credit – As an aid to families with children, the tax reform increased the child tax credit from $1,000 to $2,000 for each qualified child. A qualified child for this tax credit is one who is under age 17 at the end of the year, is related, is not self-supporting, lived with you over half the year, has a Social Security number, and is claimed as your dependent. The refundable portion of this credit is equal to 15% of your earned income but limited to $1,400.

Beginning in 2018, you are also able to claim a non-refundable credit of $500 for each of your dependents who do not qualify for the child credit.

For both the child and dependent credits, the credit begins to phase out for married taxpayers with an AGI of $400,000 ($200,000 for others).

Saver’s Credit – Congress created the non-refundable saver’s credit as a means of stimulating retirement savings among lower-income individuals. It helps to offset part of the first $2,000 that workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit is a percentage of the first $2,000 contributed to an eligible retirement plan. The following table illustrates the percentage based upon filing status and AGI for 2018.

Adjusted Gross Income Range  Credit 
Married Filing Joint Head of Household Others Percentage
$0–$38,000 $0–$28,500 $0–$19,000 50
$38,001–$41,000 $28,501–$30,750 $19,001–$20,500 20
$41,001–$63,000 $30,751–$47,250 $20,501–$31,500 10
$63,001 & Over $47,251 & Over $31,501 & Over No Credit
Example – Eric and Heather are married, both age 25, and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2018 was $28,000. The credit is computed as follows:

Eric’s 401(k) contribution was $3,000, but only the
first $2,000 can be used………………………………………………………………….. $2,000
Heather’s IRA contribution was $500, so it can all be used……………. 500
Total qualifying contributions…………………………………………………………… $2,500
Credit percentage for a MFJ AGI of $28,000 from the table……………. X .50
Non-refundable saver’s credit…………………………………………………………….$1,250

Vehicle Tax Credits – If you are considering purchasing a new car or light truck (less than 14,000 pounds), don’t overlook the fact that Congress included a substantial tax credit for the purchase of the many electric vehicles currently being offered for sale, providing a tax credit worth as much as $7,500.

To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the vehicle’s original use must commence with you, and you must use the vehicle predominantly in the United States.

Congress did include a phase-out provision for this credit that applies by vehicle manufacturer. The credit begins to phase out once the manufacturer sells 200,000 electric vehicles. To see if the make and model you are considering qualify, visit the IRS website.

The credit is available whether you use the vehicle for business, personally, or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years. The personal portion is non-refundable.

Adoption Credit – If you are an adoptive parent or are planning to adopt a child, you may qualify for the adoption credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care.

This is a 1:1 credit for each dollar of qualified expenses up to the maximum for the year, which is $13,810 for 2018. The credit is non-refundable, which means it can only reduce your tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be carried forward for up to five years to reduce your future tax liability.

Qualified expenses generally include adoption fees, court costs, attorney fees, and travel expenses that are reasonable, necessary and directly related to the child’s adoption, and they may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed, whether or not any qualified expenses were incurred.

The credit is phased out for higher-income taxpayers. For 2018, the AGI (computed without foreign-income exclusions) phase-out threshold is $207,140, and the credit is completely phased out at the AGI of $247,140. Unlike most phase-outs, this one is the same regardless of filing status. However, taxpayers filing as married filing separately cannot claim the credit.

Residential Energy Efficient Property Credit – This tax credit was created to reward individuals for investing in equipment that uses alternative energy sources to create electrical power for use in a taxpayer’s home or second home. It includes alternative power sources such as fuel cells, wind energy, and geothermal heat pumps, for which the credit expires after 2021.

However, the credit is most commonly associated with the home solar credit, which is equal to 30% of the cost of the solar electric system for an individual’s primary and second homes, with no limit on the cost of the solar system. Even though the credit is non-refundable, any amount not used in the first year carries over to subsequent years.

The credit percentage is phased-out as shown in the table.

Home Energy Credit Percentage
Year 2018–2019 2020 2021 2021
Percentage 30 26 22 None

Before deciding to add a solar electric system to your home, you need to consider if you can actually afford the system and whether it is worth having one, after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit. You should make an objective analysis without pressure from a salesperson. These credits are substantial, but the one thing salespeople and contractors typically fail to mention is that the credit is not refundable, and even though it carries over through 2021, there is a good chance you will never use it all. It may be appropriate for you to consult with this office before entering into a contract for a home solar system.

If you have questions or would like additional details related to any of these credits, please call us to speak to your tax advisor.

Credit for Family and Medical Leave Benefits

The Tax Cuts and Jobs Act that was passed last year included a new tax credit for employers that allows them to claim a credit based on wages paid to qualifying employees while they are on family and medical leave.

To qualify for the credit, an employer must have a written policy that provides at least two weeks of paid family and medical leave annually to all qualifying employees who work full time, which can be prorated for part-time. The wages paid during the leave period cannot be less than 50 percent of what the employee is normally paid.

The credit is variable. It begins at 12.5% and increases by 0.25%, up to a maximum of 25%, for each percentage point that the rate of payment exceeds 50% of the employee’s normal pay.

Example: ABC, Inc. has qualifying written policy to pay an employee 70% of their normal wage while on family or medical leave. The rate of 70% is 20 percentage points above the 50% credit threshold. Thus the credit is increased by 5% (.25 x 20), which when added to the base credit of 12.5% results in a credit percentage of 17.5% (12.5% plus 5%). Assuming the total leave wages paid for the year were $15,000, the credit would be $2,625 (.175 x $15,000).

A qualifying employee for this credit is any employee who has been employed for one year or more and who had compensation that did not exceed a specified amount for the preceding year. For 2018, the employee must not have earned more than $72,000 in 2017. Thus leave benefits for higher income taxpayers will not qualify for this credit.

For the purposes of this credit, “family and medical leave” is leave for one or more of the following reasons:

  • Birth of an employee’s child and to care for the newborn.
  • Placement of a child with the employee for adoption or foster care.
  • Care for the employee’s spouse, child or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of his or her position.
  • Any qualifying event due to an employee’s spouse, child or parent being on covered active duty — or being called to duty — in the Armed Forces.
  • Care for a service member who is the employee’s spouse, child, parent or next of kin.

The credit only applies to qualified leave wages paid to a qualifying employee for up to 12 weeks per taxable year, and the employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Any wages taken into account in determining any other general business credit may not be used toward this credit.

CAUTION – CREDIT TIME LIMITED
The credit is generally only effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019

The credit is part of the general business credit, where business incentive credits are combined into one “general business credit” for purposes of determining each credit’s allowance limitation for the tax year. A general business credit is generally limited to the taxpayer’s tax liability for the year (excluding self-employment tax), and any excess over the tax liability is carried back one year and forward 20 years. “Carrying back” means, in most instances, amending the return of the year to which the credit is carried; if no return was filed for that year, then the carryback credit would be claimed on an original late-filed return for that year.

If you have any questions relating to this credit, please give us a call.

Solar Tax Credit – The Dark Side

There are TV ads, telemarketing phone calls and sales people at your front door all promoting the benefits of solar power, and one of the key considerations and a frequently mentioned benefit is the 30% federal tax credit.

What isn’t included in the ads — and something most potential buyers are unaware of — is that the solar credit is a nonrefundable tax credit, meaning the credit can only be used to offset your tax liability. This can come as a very unpleasant surprise and is often a financial hardship when the purchaser of a home solar system finds out that the credit is nonrefundable and that they won’t get the full credit.

For example, a married couple with three children, all under age 17, and an annual income of $78,000 installed a solar system costing $20,000 in 2018, expecting a $6,000 credit on their tax return. Their standard deduction in 2018 is $24,000, leaving them with a taxable income of $54,000. The tax on the $54,000 is $6,099. They are also entitled to a $2,000 child tax credit for each child, which reduces their tax liability by $6,000 and results in a tax liability of $99. Since the solar credit is nonrefundable, the only portion of the credit they can use is $99, not the $6,000 they had expected.

On top of that, the family is probably financing the solar system, which significantly adds to the system’s cost. If the entire $20,000 cost were financed by a 5% home equity loan for 20 years, then the interest on that loan over its term would be $11,678, bringing the total cost of the solar system to $31,678 or a monthly cost of $132.

Some municipalities even allow home energy improvements to be financed through the property tax system by adding the payments to the quarterly or semi-annual property tax bills. Interest rates on these arrangements are generally higher than home equity loans, reaching levels of 9 to 10%. If the loan in our prior example would have been at 9%, then the interest on the loan over 20 years would be $23,187, bringing the total cost to $43,187 or a monthly cost of $180. It is also a common misconception that solar system payments added to the property tax bill can be deducted as property taxes. That is incorrect; however, the interest portion of the loan payment is generally deductible as home acquisition debt interest. The lender should supply a loan amortization schedule indicating the annual interest amount.

The unused credit does carry over from year to year as long as the solar energy credit is available. Currently, the credit is being phased out, and 2021 is the last year it can be claimed. Furthermore, the credit percentage rate is being phased down, with the 30% continuing through 2019 and then dropping to 26% in 2020 and 22% in its final year.

In lieu of purchasing a solar system, some homeowners opt to lease a system. This arrangement is not eligible for the solar credit.

As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right thing financially for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you.

Education Tax Credit Nuances — Don’t Leave Money on the Table

There are actually two higher-education tax credits. The American Opportunity Tax Credit (AOTC) provides up to $2,500 worth of credit for each student, 40% of which is refundable. The credit is equal to 100% of the first $2,000 of college tuition and qualified expenses and 25% of the next $2,000. The AOTC only applies to the first 4 years of post-secondary education.

The other credit is the Lifetime Learning Credit (LLC), which only provides a maximum $2,000 of credit (20% of up to $10,000 of eligible expenses) per family. None of it is refundable, meaning it can only be used to offset the taxpayer’s tax liability, and any additional credit amount is lost.

When it comes to these credits, it is easy to leave money on the table. Here are the reasons why:

  1. Many students attend local colleges for the first two years and then transfer to a university for the remainder of their education. Knowing the university tuition will be higher, some parents take the LLC and wait on the AOTC, thinking they can use it in years with higher tuition and get a larger credit. What they don’t realize is that the AOTC credit is only good for the first four years of post-secondary education. Thus, it is always better to claim the AOTC in the first four years.
  2. Parents don’t realize what constitutes a year of post-secondary education. Most students start college in the autumn after their May or June graduation from high school. Thus, for them, the first four years of post-secondary education actually span parts of five calendar years, and as a result, the student will qualify for the AOTC in five calendar years. With careful planning, students can qualify for the full $2,500 of the refundable credit in all five calendar years.
  3. A special rule allows the tuition for an academic period that begins in the first three months of the next year to be paid in advance and thus increase the amount of tuition qualifying for the credit in the year the tuition is paid. This allows for planning when to make tuition payments to maximize credits, especially in the first partial calendar year.
    Example: Cameron just graduated from high school and will be beginning college in September. Her tuition and credit-qualifying expenses for the semester covering the last four months of the year and January of the next year are $1,500. Her mother, Tricia, is aware of the 3-month rule, and in December she prepays Cameron’s $1,500 tuition for the semester beginning February 1 of the next year, bringing the qualifying expenses to a total of $3,000. The AOTC is equal to 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Thus the AOTC for Cameron is $2,250 ($2,000 + 25% of $1,000). Tricia could increase the credit for the year to the full $2,500 maximum by purchasing $1,000 worth of course materials needed for “meaningful attendance or enrollment” in Cameron’s course of study.
  4. Qualifying expenses other than tuition are often overlooked, especially in light of a recent tax regulation change that specifies for the AOTC that qualifying expenses include course materials needed for “meaningful attendance or enrollment” whether purchased from the school or an outside vendor. Previously, only course material purchased from the school qualified (and this is still the rule for the Lifetime Learning Credit). This is a significant change and opens up the possibilities of including expenses not previously allowed.
  5. Taxpayers also often overlook another very important fact: Whoever claims the tax exemption for the student gets to claim the education credit even if someone else paid for the tuition and qualified expenses.
    Example: Suppose Cameron’s Uncle Lee pays her tuition but Tricia, her mother, claims Cameron on her tax return. Tricia is the one who qualifies for and receives the credit.
  6. What many also overlook is the fact that the AOTC is phased out for higher-income taxpayers based on their adjusted gross income (AGI). It phases out for AGIs between $160,000 and $180,000 for married taxpayers filing jointly, and between $80,000 and $90,000 for others. The LLC phases out a little quicker than the AOTC: between $112,000 and $132,000 for joint filers and between $56,000 and $66,000 for others. As an exception, married taxpayers filing separately aren’t eligible to claim either credit. (Note: the LLC phaseout ranges are adjusted for inflation annually, and the one quoted is for 2017.)
    Thus, in cases when the parent claiming the student has an AGI above the phaseout range, regardless of who paid the tuition and qualified expanses, no one will be able to claim the credit. So it is important to consider the income of the individual who is claiming the student when there is an option of who claims the child, such as in cases of divorced parents.
  7. Because of gift tax issues, a person other than the one qualifying for the credit, such as a grandparent, may hesitate to volunteer to pay a tuition expense. Where payments are made directly to the educational institution, they are excluded from gift tax rules. However, depending on the amounts involved, there may be a gift tax reporting requirement if a monetary gift is given to the student or the individual who is claiming the credit and then the gift money is used to pay tuition.
  8. A question often arises as to whether tuition payments to a trade school or foreign university will count toward the education credit. To qualify for the credit, the tuition must be paid to any accredited public, nonprofit or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education. This would rule out foreign educational institutions because they don’t qualify for the student aid program administered by the Department of Education, but it would generally include most accredited public nonprofit or privately owned, profit-making post-secondary educational institutions in the U.S.

As you can see, there are several nuances associated with the education credits that must be considered. Please call this office if you need assistance with education planning or the application of the education tax credits to your particular circumstances.

Qualifying for the Work Opportunity Tax Credit

If you are an employer who is willing to help disadvantaged individuals, you could benefit from a substantial federal tax credit. Hiring certain new employees can qualify you for the work opportunity tax credit (WOTC).

The WOTC is typically worth up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.” The credit is available for eligible employees who begin working for you before January 1, 2020.

Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).

  1. Qualified IV-A recipients — generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program;
  2. Qualified veterans;
  3. Qualified ex-felons – generally, those hired within one year of release;
  4. Designated community residents — those who are aged 18 through 39 and who are living in an empowerment zone or a rural renewal area*;
  5. Vocational rehabilitation referrals — handicapped individuals who are referred by rehabilitation agencies;
  6. Qualified summer youth employees — those who are 16 or 17 years old, have never previously worked for the employer and reside in an empowerment zone*;
  7. Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP);
  8. Qualified Supplemental Security Income recipients;
  9. Qualified long-term family assistance recipients — those receiving TANF assistance payments; and
  10. Qualified long-term-unemployed individuals.
    * Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions.

For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit.

For an employee from most of the targeted groups, the credit is based upon the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000).

Two categories allow for higher first-year wages to be taken into account when calculating the credit:

  • Long-term family assistance recipients — For this category, the first-year wage that can be taken into account for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000.
  • Veterans — The three possible qualifications of veterans have applicable first-year wages for the credit of up to $12,000, up to $14,000 and up to $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.

Certification Process — To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency no later than 28 days after an eligible employee begins work. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).

Other Issues:

  • No Dual Benefits — No deduction is allowed for the portion of wages equal to the WOTC for that tax year.
  • Unused Current-Year Credit — The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).

In some circumstances, electing not to claim the credit is more beneficial for the employer. Please call us for additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances.

Did You Have to Repay Part of Your Obamacare Subsidy and Don’t Know Why?

As part of Obamacare, most everyone is required to be insured or pay a penalty. However, this created a substantial financial burden for lower-income families. To alleviate this situation, Obamacare included a subsidy, referred to as the premium tax credit (PTC), to help them pay the cost of the insurance.

That credit is based on family size, household income, household income in relationship to the federal poverty line tables and the cost of the family’s insurance.

The primary variable in determining the actual credit is the family’s household income, so the exact amount of the PTC cannot be determined until after the close of the tax year. Providing the credit after the fact on the tax return for the year does not help families to pay their premiums during the year, so to alleviate that problem, Obamacare allows families to estimate their family income when they apply for their insurance, and the government insurance marketplaces will estimate the PTC and allow it as a subsidy in advance. That subsidy is called the advance premium tax credit (APTC) and reduces the amount of the insurance premiums that the family must pay during the year.

Then, when the tax return for the year is prepared, the actual household income is known, and the actual PTC to which the family is entitled is determined. If the PTC is greater than the APTC, then the difference is credited on the tax return. However, if the APTC – the subsidy paid in advance – is greater than the actual PTC the family is entitled to, then the difference must be repaid.

So, if you had to repay some amount of the credit, it was generally due to your household income being underestimated when you signed up for the insurance, thus causing the APTC to be larger than the PTC. This is one of the hazards of estimating your household income in advance because you may receive unexpected income during the year, such as a raise, a bonus, a spouse starting to work, selling some stocks for a gain…the list goes on.

There are other reasons for a mismatch between the APTC and PTC. For instance, if your employer offered you affordable, compliant insurance for any month during the year, then you were not eligible for the PTC that month. (The IRS knows when this occurred based on a report that employers have to file.) Other things that can change the PTC include changes in family size created by marriage, divorce, children getting married, deaths, etc. Another reason is when a married couple is receiving APTC from the marketplace and files married filing separate (MFS) returns instead of filing jointly. The MFS filing status does not allow them to claim the PTC.

You can mitigate the repayments by keeping the insurance marketplace updated on your estimated family income and family size and allowing it to make appropriate adjustments to the APTC.

If you have questions related to the premium tax credit or the repayments, please give us a call.

Is Solar Energy Right for You?

It seems like you can’t watch TV these days without being exposed to home solar ads touting free electricity and big tax credits. Be careful, as these savings and tax credits may not be all that they are advertised to be; this depends upon your financial and tax circumstances. Home solar is not necessarily the best option for everyone. Before you take the leap, please take a moment to consider the tax and financial aspects of solar electric systems as they apply to your circumstances. Once you’ve done so, you can make an educated decision.

Do You Really Need It? – Although nearly everyone wants to help the environment by reducing the use of fossil fuels, not every household uses enough electricity to warrant the expense of installing solar. Thus, the first step in your analysis should be to look at your annual electricity costs to see how long it will take for the projected savings to pay off the system. Be sure to also consider how many years you plan to stay in your present home, as if you expect to move soon, you likely won’t recover your costs before selling the home.

System Cost – If you decide to install solar, shop around and do your research to find reliable contractors with good reputations. Get multiple quotes and compare them not only for cost, but also in terms of warranties, features, and kilowatt output.

Financing – This is one of the key issues that you need to carefully consider in making your decision. Systems typically cost $20,000 or more, and this depends on the home’s size and electricity needs. If you plan on financing the system, you need to be very conscious of loan interest rates, which can substantially impact the overall cost.

CAUTION: Some municipalities have set up programs through which the loan for the purchase of a solar electric system is added as a lien on the home; the payments are then made along with property tax payments. Unfortunately, the interest rates for these programs are generally substantially higher than the rates for other sources. All too frequently, the borrowers are led to believe that the payments are deductible as property taxes, but, in fact, only the interest portion of the payments are deductible as home mortgage interest.

Solar Tax Credit – As an incentive to persuade homeowners to install solar electric systems in their homes, the federal government offers a tax credit equal to 30% of the cost of solar installation (if for a primary or secondary home). However, the credit is nonrefundable, which means that it can only be used to offset tax liability; any amount of credit that is not used in the current year carries forward, however. Depending upon your circumstances, you may not even derive a meaningful benefit from the credit. Line 47 on the 1040 tax form represents your tax liability for the year, and the solar tax credit can only be used to offset that amount. In addition, the solar credit is being phased out; the credit on new installations drops to 26% in 2019 and 22% in 2021, the last year of the credit.

Another issue is that the credit is not allowed if you lease a solar electric system instead of purchasing it.

Interest Deduction – Because the addition of a solar electric system would be treated as a home improvement, if your loan to finance a system is secured by your home, the interest is deductible as home mortgage acquisition interest – provided that you itemize your deductions and that the sum of all your primary and secondary home acquisition debt does not exceed $1 million.

The final issue is whether you can actually afford the solar electric system. Is it worth having one after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit? We can assist you in conducting an objective analysis without pressure from a salesperson. Please call us before committing to purchase a solar electric system.

The IRS Has Become More Liberal With College Expenses

Computers and the Internet have become integral parts of education by providing access to online courses, learning and research. It is virtually impossible to be enrolled in postsecondary education without a computer, which is needed to complete written assignments, type reports, prepare theses and access the Internet.

Recent tax regulations have acknowledged the fact that computers, peripheral equipment, certain types of nonentertainment software, Internet access and related services are essential for postsecondary education. Thus, when those items are used primarily by a beneficiary of a qualified state tuition (Sec 529) plan, the cost of the items can be reimbursed from the plan’s funds, tax-free.

In addition, the regulations for the American Opportunity Tax Credit (AOTC) have been modified (effective in 2016) to clarify that the AOTC’s definition of qualified tuition and related expenses includes books, supplies and any other equipment that is required for enrollment or attendance at an eligible institution. For this purpose, the materials must be needed for “meaningful attendance or enrollment” in a course of study; they can be purchased from the institution or an outside vendor.

Computers are not specifically listed in the new AOTC regulations, but the wording certainly implies that a computer qualifies as long as it is required for meaningful attendance. This change is so new that there is no precedent for how the IRS will apply the regulations to computers, as the regulations do not specifically include them. To be on the safe side, each student seeking the credit should get an instructor to write a letter (on school letterhead) stating, “A computer is required for meaningful attendance.

For more information regarding which education expenses qualify for Sec 529 plan reimbursements or for the AOTC, please give this office a call.

Big Tax Break for Adoptive Parents

If you are an adoptive parent or are planning to adopt a child, you may qualify for a substantial income-tax credit. The amount of the credit is based on any expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care.

This is a 1:1 credit for each dollar of qualified expenses up to a maximum for the year, which is $13,570 for 2017 (up from $13,460 in 2016). The credit is nonrefundable, which means it can only reduce tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be used for up to five years to reduce future tax liability.

Qualified expenses generally include adoption fees, court costs, attorney fees and travel expenses that are reasonable, necessary and directly related to the adoption of the child, and may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed whether or not any qualified expenses were incurred. A child with special needs is, among other requirements, a child who the state has determined (a) cannot or should not be returned to his or her parents’ home and (b) that the child won’t be adopted unless assistance is provided to the adoptive parents.

The credit is phased out for higher-income taxpayers. For 2017, the AGI (computed without foreign-income exclusions) phase-out threshold is $203,540, and at the AGI of $243,540, the credit is completely phased out. Unlike most phase-outs, this one is the same regardless of filing status. However, the credit cannot be claimed by taxpayers using the filing status married filing separately.

If your employer has an adoption-assistance program, up to $13,570 of reimbursements by the employer are excludable from income. Both the tax credit and the exclusion may be claimed, though not for the same expenses.

If you think you qualify for this credit or are planning an adoption in the future, please contact this office for further credit details and to find out how this credit can apply to your particular circumstances.