The Inflation Reduction Act (IRA), enacted in 2022, created several tax credits aimed at promoting clean energy. You may want to take advantage of them before it’s too late.

On the campaign trail, President-Elect Donald Trump pledged to “terminate” the law and “rescind all unspent funds.” Rescinding all or part of the law would require action from Congress and is possible when Republicans take control of both chambers in January. The credits weren’t scheduled to expire for many years, but they may be repealed in 2025 with the changes in Washington.

If you’ve been thinking about making any of the following eligible purchases, you may want to do it before December 31.

1. Home energy efficiency improvements

Homeowners can benefit from several tax credits for making energy-efficient upgrades to their homes. These include:

• Energy Efficient Home Improvement Credit: This credit covers 30% of the cost of eligible home improvements, such as installing energy-efficient windows, doors, and insulation, up to a maximum of $1,200 this year. There’s also a credit of up to $2,000 for qualified heat pumps, water heaters, biomass stoves or biomass boilers.
• Residential Clean Energy Credit: This credit is available for installing solar panels, wind turbines, geothermal heat pumps, and other renewable energy systems. It covers 30% of the cost.
• Energy Efficient Property Credit: For those investing in clean energy for their homes, this credit offers a significant incentive. It covers 30% of the cost of installing solar water heaters and other renewable energy sources.

2. Clean vehicle tax credit

One of the most notable IRA provisions is the clean vehicle tax credit. If you purchase a new electric vehicle (EV) or fuel cell vehicle (FCV), you may qualify for a tax credit of up to $7,500. The credit for a pre-owned clean vehicle can be up to $4,000. To be eligible, the vehicle must meet specific criteria, including price caps and income limits for the buyer.

The credit can be claimed when you file your tax return. Alternatively, you can transfer it to an eligible dealer when you buy a vehicle, which effectively reduces the vehicle’s purchase price by the credit amount.

3. Electric Vehicle Charging Equipment Credit

If you install an EV charging station at your home, you can claim a credit of 30% of the cost, up to $1,000. This credit is designed to encourage the adoption of electric vehicles by making it more affordable to charge at home.

Act now

These are only some of the tax breaks in the IRA that may reduce your federal tax bill while promoting clean energy.

IRS data has shown that the tax breaks are popular. For example, in 2023 (the first year available), approximately 750,000 taxpayers claimed the credit for rooftop solar panels. Keep in mind that a tax credit is more valuable than a tax deduction. A credit directly reduces the amount of tax you owe, dollar for dollar, while a deduction reduces your taxable income, which is the amount subject to tax.

So, act now if you want to take advantage of these credits. There may also be state or local utility incentives. Contact us before making a large purchase to check if it’s eligible.

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Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.

We’ll explain what you need to know about the federal income and employment tax rules for employer-issued nonqualified stock options (NQSOs).

Tax planning objectives 

You’ll eventually sell shares you acquire by exercising an NQSO, hopefully for a healthy profit. When you do, your tax planning objectives will be to:

1. Have most or all of that profit taxed at lower long-term capital gain rates.
2. Postpone paying taxes for as long as possible.

Tax results when acquiring and selling shares

NQSOs aren’t subject to any tax-law restrictions, but they also confer no special tax advantages. That said, you can get positive tax results with advance planning.

When you exercise an NQSO, the bargain element (difference between market value and exercise price) is treated as ordinary compensation income — the same as a bonus payment. That bargain element will be reported as additional taxable compensation income on Form W-2 for the year of exercise, which you get from your employer.

Your tax basis in NQSO shares equals the market price on the exercise date. Any subsequent appreciation is capital gain taxed when you sell the shares. You have a capital loss if you sell shares for less than the market price on the exercise date.

Let’s look at an example

On December 1, 2023, you were granted an NQSO to buy 2,000 shares of company stock at $25 per share. On April 1, 2024, you exercised the option when the stock was trading at $34 per share. On May 15, 2025, the shares are trading at $52 per share, and you cash in. Assume you paid 2024 federal income tax on the $18,000 bargain element (2,000 shares × $9 bargain element) at the 24% rate for a tax of $4,320 (24% × $18,000).

Your per-share tax basis in the option stock is $34, and your holding period began on April 2, 2024. When you sell on May 15, 2025, for $52 per share, you trigger a $36,000 taxable gain (2,000 shares × $18 per-share difference between the $52 sale price and $34 basis). Assume the tax on your long-term capital gain is $5,400 (15% × $36,000).

You net an after-tax profit of $44,280 when all is said and done. Here’s the calculation: Sales proceeds of $104,000 (2,000 shares × $52) minus exercise price of $50,000 (2,000 shares × $25) minus $5,400 capital gains tax on the sale of the option shares minus $4,320 tax upon exercise.

Since the bargain element is treated as ordinary compensation income, the income is subject to federal income tax, Social Security and Medicare tax withholding.

Key point: To keep things simple, the example above assumes you don’t owe the 3.8% net investment income tax on your stock sale gain or any state income tax.

Conventional wisdom and risk-free strategies

If you had exercised earlier in 2024 when the stock was worth less than $34 per share, you could have cut your 2024 tax bill and increased the amount taxed later at the lower long-term capital gain rates. That’s the conventional wisdom strategy for NQSOs.

The risk-free strategy for NQSOs is to hold them until the earlier of 1) the date you want to sell the underlying shares for a profit or 2) the date the options will expire. If the latter date applies and the options are in-the-money on the expiration date, you can exercise and immediately sell. This won’t minimize the tax, but it eliminates any economic risk. If your options are underwater, you can simply allow them to expire with no harm done.

Maximize your profit

NQSOs can be a valuable perk, and you may be able to benefit from lower long-term capital gain tax rates on part (maybe a big part) of your profit. If you have questions or want more information about NQSOs, consult with us.

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Hiring household help, whether you employ a nanny, housekeeper or gardener, can significantly ease the burden of childcare and daily chores. However, as a household employer, it’s critical to understand your tax obligations, commonly called the “nanny tax.” If you hire a household employee who isn’t an independent contractor, you may be liable for federal income tax and other taxes (including state tax obligations).

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

2024 and 2025 thresholds

In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount will increase to $2,800 in 2025. If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Making payments 

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. And you use your sole proprietorship EIN to report the taxes.

Maintain detailed records 

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amount of wages paid, taxes withheld and copies of forms filed.

Contact us for assistance or if you have questions about how to comply with these requirements.

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When you think about tax deductions for vehicle-related expenses, business driving may come to mind. However, businesses aren’t the only taxpayers that can deduct driving expenses on their returns. Individuals may also be able to deduct them in certain circumstances. Unfortunately, under current law, you may be unable to deduct as much as you could years ago.

How the TCJA changed deductions

For years before 2018, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. The changes resulted from the Tax Cuts and Jobs Act (TCJA), which could also affect your tax benefit from medical and charitable miles.

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. The deduction was subject to a 2% of adjusted gross income (AGI) floor, meaning that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. However, for 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends all miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage can still be deducted from self-employment income. It’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

Medical and moving

Miles driven for a work-related move before 2018 were generally deductible “above the line” (itemizing wasn’t required to claim the deduction). However, for 2018 through 2025, under the TCJA, moving expenses are deductible only for active-duty military members.

If you itemize, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. For 2024, medical expenses are deductible to the extent they exceed 7.5% of your AGI.

The limits for deducting expenses for charitable miles driven are set by law and don’t change yearly based on inflation. But keep in mind that the charitable driving deduction can only be claimed if you itemize. For 2018 through 2025, the standard deduction has nearly doubled, so not as many taxpayers are itemizing. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).

Rates depend on the trip

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The 2024 rates vary depending on the purpose:

• Business, 67 cents per mile.
• Medical, 21 cents per mile.
• Moving for active-duty military, 21 cents per mile.
• Charitable, 14 cents per mile.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.

We can answer any questions 

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning.

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As the end of the year approaches, many people start to think about their finances and tax strategies. One effective way to reduce potential estate taxes and show generosity to loved ones is by giving cash gifts before December 31. Under tax law, you can gift a certain amount each year without incurring gift taxes or requiring a gift tax return. Taking advantage of this rule can help you reduce the size of your taxable estate while benefiting your family and friends.

Taxpayers can transfer substantial amounts, free of gift taxes, to their children or other recipients each year through the proper use of the annual exclusion. The exclusion amount is adjusted for inflation annually, and in 2024 is $18,000. It covers gifts that an individual makes to each recipient each year. So a taxpayer with three children can transfer $54,000 ($18,000 × 3) to the children this year, free of federal gift taxes. If the only gifts during a year are made this way, there’s no need to file a federal gift tax return. If annual gifts exceed $18,000 per recipient, the exclusion covers the first $18,000 and only the excess is taxable.

Note: This discussion isn’t relevant to gifts made to a spouse because they’re gift-tax-free under separate marital deduction rules.

Married taxpayers can split gifts 

If you’re married, gifts made during a year can be treated as split between the spouses, even if the cash or asset is given to an individual by only one of you. Therefore, by gift splitting, up to $36,000 a year can be transferred to each recipient by a married couple because two exclusions are available. For example, a married couple with three married children can transfer $216,000 ($36,000 × 6) each year to their children and the children’s spouses.

If gift splitting is involved, both spouses must consent to it. This is indicated on the gift tax return (or returns) that the spouses file. (If more than $18,000 is being transferred by a spouse, a gift tax return must be filed, even if the $36,000 exclusion covers the total gifts.)

More rules to consider 

Even gifts that aren’t covered by the exclusion may not result in a tax liability. That’s because a tax credit wipes out the federal gift tax liability on the first taxable gifts you make in your lifetime, up to $13.61 million in 2024. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death.

For a gift to qualify for the annual exclusion, it must be a “present interest” gift, meaning you can’t postpone the recipient’s enjoyment of the gift to the future. Other rules may apply. Contact us with questions. We can also prepare a gift tax return for you if you give more than $18,000 (or $36,000 if married) to a single person this year or make a split gift.

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Let’s say you have an unincorporated sideline activity that you consider a business. Perhaps you offer photography services, create custom artwork or sell handmade items online. Will the IRS agree that your venture is a business, not a hobby? It’s an essential question for tax purposes.

If the expenses from an activity exceed the revenues, you have a net loss. You may think you can deduct that loss on your personal federal income tax return with no questions asked. Not so fast! The IRS often claims that money-losing sidelines are hobbies rather than businesses — and the federal income tax rules for hobbies aren’t in your favor.

TCJA made tax rules worse

Old rules: Before the TCJA rules kicked in in 2018, if an activity was deemed to be a not-for-profit hobby, you had to report all the revenue on your Form 1040. You could deduct hobby-related expenses, such as itemized deductions for allocable home mortgage interest and property taxes. Other hobby-related expenses — up to the amount of revenue from the hobby — could potentially be written off. You had to treat those other outlays as miscellaneous itemized expenses that you could only deduct to the extent they exceeded 2% of your adjusted gross income (AGI).

Current rules: For 2018 through 2025, the TCJA suspends write-offs for miscellaneous itemized deduction items previously subject to the 2%-of-AGI deduction threshold. That change wipes all deductions for hobby-related expenses, except for expenses you can write off in any event (such as itemized deductions for allocable mortgage interest and property taxes). So, under current law, you can’t deduct any hobby-related expenses. As was the case before the TCJA, you must still report 100% of hobby-related income on your Form 1040. So, you’ll be taxed on all the income even if the activity loses money.

Determine if your activity is a business

Now you understand why for-profit business status is more beneficial than hobby status. The next step is determining if your money-losing activity is a hobby or a business.

There are two statutory safe-harbor rules for determining if you have a for-profit business:

• An activity is presumed to be a for-profit business if it produces positive taxable income in at least three out of every five years. You can deduct losses from the other years because they’re considered business losses.
• A horse racing, breeding, training or showing activity is presumed to be a for-profit business if it produces positive taxable income in at least two out of every seven years.

If you don’t qualify for one of the safe-harbor rules, you may still be able to treat the activity as a for-profit business and rightfully deduct the losses. You must demonstrate an honest intent to make a profit. Here are some of the factors that can prove (or disprove) such intent:

• You conduct the activity in a business-like manner by keeping good records.
• You have expertise in the activity or hire advisers who do.
• You spend enough time to help show the activity is a business.
• There’s an expectation of asset appreciation.
• You’ve had success in other ventures, which indicates business acumen.
• The history and magnitude of income and losses from the activity help show it’s a business. Losses caused by unusual events are more justifiable than ongoing losses that only a hobbyist would endure.
• If you’re wealthy, it may look like you can afford to absorb ongoing losses, which may indicate a hobby.
• If the activity has elements of personal pleasure, it may appear to be a hobby.

Don’t be discouraged

On the bright side, the U.S. Tax Court has, over the years, concluded that a number of pleasurable activities could be classified as for-profit business ventures rather than tax-disfavored hobbies. We may be able to help you create documentation to prove that your money-losing activity is actually a for-profit business that hasn’t paid off yet.

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