[h=1]Energy Costs Rise as Tax Incentives Fade[/h] With energy costs skyrocketing, you would think that the federal government would come up with some tax incentives aimed at curbing the consumption of energy. However, on the consumer end of taxes, the incentives are actually fading away. Apparently, federal lawmakers and administrators believe the high cost of energy itself is incentive enough to reduce consumption. The following are the only energy-related tax incentives remaining for individual taxpayers:
[h=1]Higher Income Taxpayers Hit with Exemption & Itemized Deductions Phase-out[/h] Generally, taxpayers are allowed to deduct personal exemptions of $3,900 for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large, they can itemize their deductions.
The American Taxpayer Relief Act of 2012 included a provision to phase out, beginning in 2013, both the personal exemptions and itemized deductions for higher income taxpayers. The phase-out will begin when a taxpayer’s adjusted gross income (AGI) reaches a phase-out threshold amount.
The threshold amounts are based on the taxpayers’ filing statuses and are: $250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately. Here is how the phase-out will work:
[h=1]Tax Facts about Summertime Child Care Expenses[/h] Many parents who work or are looking for work must arrange for care of their children during the school vacation. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit.
The credit ranges from 20% to 35% (the IRS provides a table) 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. As an example, if your income (AGI) is below $15,000, the credit percentage is 35% and gradually reduces as your income increases, until it caps out at 20% for incomes above $43,000. The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more. The credit is non-refundable, which means it can only reduce your tax to zero and the excess is lost.
The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there’s an exception for divorced or separated parents). Here are some additional details:
[h=1]Franklin Katz, ATP, PA, PB[/h][h=1]Frank's Tax & Business Service[/h][h=1]315 E. King St.[/h][h=1]Kings Mountain, NC 28086[/h][h=1]704-739-4039 [/h][h=1]E-Mail: [email protected])[/h]
[h=1]Web: www.prep.1040.com/frankstax[/h][h=1]
Circular 230Disclaimer[/h]Circular230: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advicecontained in our communication (including any attachments) was not intended orwritten to be used, and cannot be used, for the purpose of (i) avoiding any taxpenalty or (ii) promoting, marketing or recommending to another party anytransaction or matter addressed herein.
Our advice in our communication is limited to the conclusions specifically setforth herein and is based on the completeness and accuracy of the facts andassumptions as stated. Our advice may consider tax authorities that are subjectto change, retroactively and/or prospectively. Such changes could affect thevalidity of our advice. Our advice will not be updated for subsequent changesor modifications to applicable law and regulations, or to the judicial andadministrative interpretations thereof.
Legally privileged and/or confidential information may be contained in ourcommunication; it is intended exclusively for the addressee. Opinions,conclusions and other information expressed in our communication are subject tothe terms and conditions expressed in the governing client engagement letter.If you are not the addressee (or designated representative) indicated in thismessage, you may not disclose, copy, or distribute this message to anyone.Action taken or omitted based on our communication is prohibited and may beunlawful.
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- Credit for Energy-Efficient Home Modifications - Through 2013, a taxpayer can still claim a credit for making qualifying energy-saving improvements to his existing home. But after 2013, this credit will not be available. The credit is 10% of the cost of making the improvement but is limited to $500 and is reduced by any credit claimed under this provision in any prior year.
Qualified energy-efficiency improvements are the following building-envelope components installed on or in a taxpayer’s main home in the United States that the taxpayer owned during 2012, provided that the original use of the component (1) began with the taxpayer and the component can be expected to remain in use at least 5 years and (2) the component meets certain energy standards. These credits are nonrefundable and can offset both income tax and alternative minimum tax (AMT) for the year.- Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home when installed in or on the home(1).o Exterior windows and skylights. The credit for these items is limited to $200(1)(2).
- Exterior doors(1)(2).
- Any metal roof with appropriate pigmented coatings or an asphalt roof with appropriate cooling granules that are specifically and primarily designed to reduce the heat gain of the home(1)(2).
- Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel. No more than $300 if the cost is credit-eligible.
- Qualified natural gas, propane, or oil furnaces and qualified natural gas, propane, or oil hot water boilers. No more than $150 of the cost is credit-eligible.
- Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. No more than $50 of the cost is credit-eligible.
(1) To figure the credit, do not include the amounts paid for the onsite preparation, assembly, or original installation.
(2) Must meet or exceed the Energy Star program requirements.
- Energy Generation Credits - Through 2016, a taxpayer can claim a credit for installing systems that generate energy. The expenses used to determine the credit include installation costs; but generally no portion of the cost allocated to heating a swimming pool or hot tub can be used toward the credit.
- Solar electric systems - A credit equal to 30% of the cost for the installation of a qualified solar electric system (50% of the energy is generated from the sun) in the taxpayer’s primary or secondary home in the United States.
- Solar water heating systems - A credit equal to 30% of the cost for the installation of a qualified solar water heating system in the taxpayer’s primary or secondary home in the United States.
- Fuel cell power plant - A credit of $500 per 0.5 kilowatts of electricity generated by electrochemical means from a qualified fuel cell plant installed in the taxpayer’s primary home in the United States.
These credits are nonrefundable and can offset both income tax and AMT for the year. However, any unused credit can be carried forward.
- Plug-in Electric Vehicles Credit - The American Taxpayer Relief Act (ATRA) of 2012 modified and extended for two years, through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles, replacing the 10% tax credit that expired at the end of 2011 for plug-in electric motorcycles, 3-wheeled vehicles, and low-speed vehicles.
Through revised definitions, ATRA repeals the ability of golf carts and other low-speed vehicles to qualify for the credit. The credit continues to be the lesser of 10% of the purchase cost or $2,500 per qualified vehicle. The revised rules require that the vehicle must have been manufactured primarily for use on public streets, roads, and highways; be capable of a speed of at least 45 miles per hour; and be acquired in 2012 or 2013.
Other requirements are the same as under the old credit: The vehicle must have 2 or 3 wheels, have a gross vehicle weight rating of fewer than 14,000 pounds, and have been acquired for use or lease by the taxpayer and not for resale. The original use must be with the taxpayer and the vehicle must have been made by a manufacturer and be propelled to a significant extent by an electric motor that draws electricity from a battery with a capacity of no less than 2.5 kilowatt hours.
The personal use portion of this credit is nonrefundable and may offset both the current year’s income tax and AMT. However, if the vehicle is used for business, the unused business portion of the credit can be carried back one year and then carried forward up to 20 years. This credit (other than any business portion being carried over) will no longer be available after 2013.
[h=1]Higher Income Taxpayers Hit with Exemption & Itemized Deductions Phase-out[/h] Generally, taxpayers are allowed to deduct personal exemptions of $3,900 for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large, they can itemize their deductions.
The American Taxpayer Relief Act of 2012 included a provision to phase out, beginning in 2013, both the personal exemptions and itemized deductions for higher income taxpayers. The phase-out will begin when a taxpayer’s adjusted gross income (AGI) reaches a phase-out threshold amount.
The threshold amounts are based on the taxpayers’ filing statuses and are: $250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately. Here is how the phase-out will work:
- Personal Exemption - The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer’s AGI exceeds the threshold amount for the taxpayer’s filing status.
Example: Ralph and Louise have an AGI of $412,500 for 2013 and two children for a total of four exemptions totaling $15,600 (4 × $3,900). The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500. Dividing $112,500 by $2,500 equals 45. So 90% (45 × 2%) of their $15,600 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,560 ((100–90) × $15,600). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 × 90% × 33%).
Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. Where a taxpayer is a party to a multiple support agreement, the taxpayer may want to allow another contributing member of the agreement who is not hit by the phase-out to claim the dependent’s exemption. - Itemized Deductions - The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
Not all itemized deductions are subject to phase-out. The following deductions are not subject to the phase-out:
o Medical and dental expenses
o Investment interest expenses
o Casualty and theft losses from personal-use property
o Casualty and theft losses from income-producing property
o Gambling losses
Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out and 100% of the deductions listed above.
Example: Ralph and Louise from the previous example, who had an AGI of $412,500 for 2013, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2013, Ralph and Louise had the following itemized deductions:
Subject
to Phase-outNot Subject
to Phase-outHome mortgage interest: $10,000Taxes: $8,000Charitable contributions: $6,000Casualty loss: $12,000Total: $24,000$12,000
The phase-out is the lesser of $3,375 or 80% of $24,000. Thus Ralph and Louise’s itemized deductions for 2013 will be $32,625 ($24,000 $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out will cost them an additional $1,114 ($3,375 × 33%).
Conventional thinking is to maximize deductions. However, where taxpayers normally are not subject to a phase-out and have a high-income year because of unusual income, it may be appropriate, where possible, to defer paying deductible expenses to the year following the high-income year or perhaps pay and deduct the expenses in the preceding year.
[h=1]Tax Facts about Summertime Child Care Expenses[/h] Many parents who work or are looking for work must arrange for care of their children during the school vacation. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit.
The credit ranges from 20% to 35% (the IRS provides a table) 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. As an example, if your income (AGI) is below $15,000, the credit percentage is 35% and gradually reduces as your income increases, until it caps out at 20% for incomes above $43,000. The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more. The credit is non-refundable, which means it can only reduce your tax to zero and the excess is lost.
The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there’s an exception for divorced or separated parents). Here are some additional details:
- Day Camps - The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers.
- Overnight Camp or Tutoring - No portion of the cost of an overnight camp or a tutoring program is a qualified expense.
- School Expenses - Only school expenses for a child below the level of kindergarten will qualify for the credit.
- Day Care Facility - The expenses paid the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws.
- In Home Care - If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.
- Maximum Qualifying Expenses - You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more depending upon your income. If the expenses exceed your work earnings, use the earnings to figure the credit. Dependent care benefits received through your employer will also affect the computation of the credit, and could result in no credit being allowed.
- Records Required - To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information. Where you have more than one child you must also show the expenses paid for each child, up to the $3,000 maximum per child. If your state allows a child care credit, additional information, such as the care provider’s phone number, may be required.
[h=1]Franklin Katz, ATP, PA, PB[/h][h=1]Frank's Tax & Business Service[/h][h=1]315 E. King St.[/h][h=1]Kings Mountain, NC 28086[/h][h=1]704-739-4039 [/h][h=1]E-Mail: [email protected])[/h]
[h=1]Web: www.prep.1040.com/frankstax[/h][h=1]
Circular 230Disclaimer[/h]Circular230: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advicecontained in our communication (including any attachments) was not intended orwritten to be used, and cannot be used, for the purpose of (i) avoiding any taxpenalty or (ii) promoting, marketing or recommending to another party anytransaction or matter addressed herein.
Our advice in our communication is limited to the conclusions specifically setforth herein and is based on the completeness and accuracy of the facts andassumptions as stated. Our advice may consider tax authorities that are subjectto change, retroactively and/or prospectively. Such changes could affect thevalidity of our advice. Our advice will not be updated for subsequent changesor modifications to applicable law and regulations, or to the judicial andadministrative interpretations thereof.
Legally privileged and/or confidential information may be contained in ourcommunication; it is intended exclusively for the addressee. Opinions,conclusions and other information expressed in our communication are subject tothe terms and conditions expressed in the governing client engagement letter.If you are not the addressee (or designated representative) indicated in thismessage, you may not disclose, copy, or distribute this message to anyone.Action taken or omitted based on our communication is prohibited and may beunlawful.
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