Federal Tax News

Are you thinking about buying a plug-in electric car or truck? Fortunately, a tax credit is available for qualified vehicles. The base amount of the credit is $2,500 per vehicle. The vehicle must be new and have battery capacity of at least four kilowatt hours. The allowable credit is increased by up to an additional $5,000 per vehicle based on a formula which increases by $417 for every kilowatt hour of battery capacity in excess of five. The total credit is up to $7,500. It is allowed in the year you place the vehicle in service. The vehicle must have a gross weight of less than 14,000 pounds.

New vehicles have recently been added to the list of those qualifying for the tax break. The IRS has added these models to the list of vehicles that are eligible for the credit: the 2022 BMW 745e xDrive (credit amount of $5,836); the 2022 MINI Cooper SE Countryman ALL4 (credit amount of $5,002); the 2022 MINI Cooper SE Hardtop (credit amount of $7,500); the 2021 Porsche Taycan EV (credit amount of $7,500); and the 2021 Bentley Motors Bentayga Hybrid SUV (credit amount of $7,500). For a list of all qualifying vehicles: https://bit.ly/2T5zL0p

Deducting business meals and vehicle expenses requires strict substantiation. In one case, a taxpayer worked as a notary and paralegal. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business. The deductions were denied. According to the U.S. Tax Court, she gave vague testimony that she “talked strategies” with people who “wanted her to do some work” at meals. It was insufficient to show the connection between her meals and her business.

The court noted that the Internal Revenue Code establishes higher substantiation requirements for expenses related to meals. No deduction or credit is allowed for these expenses “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer…” The taxpayer in this case also failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip, or her business relationship to places visited, and she conceded that she used her car for both business and personal activities. (Chancellor, TC Memo 2021-50)

When do the monthly Child Tax Credit (CTC) payments begin? The IRS announced that the 2021 advance CTC payments, provided for in the American Rescue Plan Act (ARPA), will begin being made on July 15. For 2021 only, the ARPA expanded the CTC. Eligible taxpayers will receive a $3,000 credit for each child ages 6 to 17 and a $3,600 credit for each child under age 6. The monthly amounts will be up to $300 monthly for each child under 6 and up to $250 monthly for each child 6 and older. The credit phases out for taxpayers with adjusted gross incomes over certain thresholds. The monthly advance CTC payments in total equal 50% of the IRS’s estimate of an eligible taxpayer’s 2021 CTC, during the period July 2021 through Dec. 2021. Recipients will receive the monthly payments through direct deposit, paper checks or debit cards.

How many Americans will benefit from these payments and will they have to do anything to receive them? According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.” For more details: https://bit.ly/3f0hQkb

The U.S. Department of Labor (DOL) has provided answers to frequently asked questions about the COBRA premium assistance credit. The American Rescue Plan Act has added a 100% premium subsidy for qualified beneficiaries who are: 1) currently enrolled in COBRA; or 2) eligible but didn’t enroll previously or enrolled but dropped out. It covers the period of April 2021 through September 2021. The subsidy is available only to employees who lost group coverage because they were involuntarily terminated or their hours were reduced. Generally, the FAQs cover eligibility requirements, period of coverage, premiums information and notice requirements. Read the DOL’s FAQs here: https://bit.ly/3ultHPa

The IRS has also issued guidance about the tax credit for entities that maintain group health plans. Notice 2021-31 provides details about calculating the credit, eligibility of individuals and other information for employers, plan administrators and insurers.

The inflation-adjusted Health Savings Account (HSA) thresholds for next year have been announced. An HSA is a trust created or organized in the U.S. exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An account can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” The IRS announced that for calendar year 2022, a high deductible health plan is one with:

·       An annual deductible of at least $1,400 for individual coverage (unchanged from 2021), or $2,800 for family coverage (unchanged from 2021); and

·       Maximum out-of-pocket expenses of $7,050 for individual coverage (up from $7,000 in 2021), or $14,100 for family coverage (up from $14,000 in 2021).

For 2022, the maximum annual contribution to an HSA is $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 for family coverage (up from $7,200 in 2021).