Hiring? How to Benefit from the Work Opportunity Tax Credit

If you’re a business owner or manager who is seeking to hire, you should be aware of the details of a valuable tax credit for hiring individuals from one or more targeted groups. Employers can qualify for the Work Opportunity Tax Credit (WOTC), which is worth as much as $2,400 for most eligible employees (higher or lower for certain employees). The credit is limited to eligible employees who begin work for an employer before January 1, 2026.

Who is Eligible?

Generally, an employer is eligible for the WOTC only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

To claim the WOTC, an employer must first get certification that the person hired is a member of one of the targeted groups above. An employer can do so by submitting Form 8850, Pre-Screening Notice and Certification Request for the WOTC, to their state agency within 28 days after the eligible worker begins work.

You Must Meet Certain Requirements

There are several requirements to qualify for the credit. For example, each employee must have completed a specific number of hours of service for the employer. Also, the credit isn’t available for employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for first-year wages generally is $2,400 per employee. But it’s $4,000 for long-term family assistance recipients, and it’s $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

An eligible employer claims the WOTC on its federal income tax return. The credit value is limited to the business’s income tax liability.

A Valuable Credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be worthwhile. Contact the office with questions or for more information about your situation.

408-252-1800

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Deductions vs. Credits: What’s the Difference?

One of the most common misunderstandings about filing an income tax return is the difference between deductions and credits. Deductions reduce the amount of a taxpayer’s income before tax is calculated. For example, on your individual return, you can either take the standard deduction or itemize deductions, if it will reduce your taxable income more. Credits, on the other hand, reduce the actual tax due, dollar-for-dollar, generally making them more valuable than deductions.

For example, the tax savings from a $1,000 deduction would depend on your tax bracket; it would save you $150 if you’re in the 15% tax bracket but it would save you $350 if you’re in the 35% tax bracket. A $1,000 credit, on the other hand would save you $1,000 in taxes regardless of your tax bracket. (These examples assume no income-based phaseout or limit applies to the deduction or credit.)

Some credits, such as the Child Tax Credit, are partially or fully refundable. This means that if a taxpayer’s tax liability is less than the amount of the credit, the taxpayer can possibly receive the difference as a refund.

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Businesses Can Save Taxes by Acquiring and Placing Assets in Service by Year End

Under Section 179 of the Internal Revenue Code, companies can “expense” the full cost of qualifying fixed assets to reduce their taxable income. This means they can deduct the purchase amount currently rather than having to depreciate the asset over many years. Both new and used fixed assets can qualify. The election is available for qualified property placed in service anytime during the tax year.

If you’d like to reduce your 2023 tax liability and are on a calendar tax year, consider acquiring and placing in service qualified assets by Dec. 31, 2023.

For 2023, the maximum overall deduction allowed is $1.16 million (increasing to $1.22 million for 2024). The total asset purchase limit for 2023 is $2.89 million (increasing to $3.05 million for 2024), after which the deduction for the year is reduced dollar-for-dollar until it’s eliminated. You may be able to claim bonus depreciation (80% for 2023, falling to 60% for 2024) on eligible amounts in excess of your Sec. 179 expensing limit.

Kids’ Day Camp Expenses May Qualify for a Tax Credit

Day camps are common during school vacations and the summer months. And their cost may count towards the child and dependent care credit.

Here are five things parents should know:

1. Care for Qualifying Persons: You may qualify for the credit whether you pay for care at home, at a daycare facility, or a day camp. Your expenses must be for the care of one or more qualifying persons, such as your dependent child under age 13.

2. Work-Related Expense: In other words, you must be paying for the care so you can work or look for work.

3. Expense Limits: The total expense you can claim in a year is limited. The limit is generally $3,000 for one qualifying person or $6,000 for two or more.

4. Credit Amount: The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.

5. Excluded Care: Certain types of care don’t qualify for the credit, including:

  • Overnight camps,
  • Summer school tutoring,
  • Care provided by your spouse or child under age 19 at the end of the year, and
  • Care given by a person you can claim as your dependent.

Remember that this credit is not just a school vacation or summer tax benefit. You may be able to claim it at any time during the year for qualifying care. For more information, please call the office.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Tax Credits for Energy-Efficient Home Improvements

Taxpayers making certain energy-efficient updates to their homes are reminded that they could qualify for home energy tax credits. The credit amounts and types of qualifying expenses were expanded by the Inflation Reduction Act of 2022. Taxpayers who make energy improvements to a residence may be eligible for expanded home energy tax credits.

What Taxpayers Need To Know

Taxpayers can claim two tax credits for the year the qualifying expenditures are made: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. Before purchasing energy-efficient equipment, taxpayers are encouraged to review all requirements and qualifications at IRS.gov/homeenergy. Additional information is also available on energy.gov, which compares the credit amounts for tax year 2022 and tax year 2023.

Homeowners making improvements to their primary residence will benefit the most from these tax credits; however, renters may also be able to claim credits, as well as owners of second homes used as residences. Landlords cannot claim this credit. Let’s take a closer look at how these credits work:

Energy Efficient Home Improvement Credit

Under the Inflation Reduction Act, taxpayers that make qualified energy-efficient improvements to their home after January 1, 2023, may qualify for a tax credit of up to $3,200 for the tax year the improvements are made. Beginning January 1, 2023, the credit equals 30% of certain qualified expenses:

1. Qualified energy efficiency improvements installed during the year, which can include things such as:

  • iExterior doors, windows and skylights.
  • Insulation and air sealing materials or systems.

2. Residential energy property expenses such as:

  • Central air conditioners.
  • Natural gas, propane, or oil water heaters.
  • Natural gas, propane or oil furnaces, and hot water boilers.

3. Heat pumps, water heaters, biomass stoves, and boilers.

4. Home energy audits of a main home.

The maximum credit that can be claimed each year is:

  • $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150).
  • $2,000 annually for qualified heat pumps, biomass stoves, or biomass boilers.

The credit is available only for qualifying expenditures to an existing home or for an addition or renovation of an existing home and not for a newly constructed home. The credit is nonrefundable, which means taxpayers cannot get back more from the credit than what is owed in taxes, and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

Taxpayers who invest in energy improvements for their main home, including solar, wind, geothermal, fuel cells, or battery storage, may qualify for an annual residential clean energy tax credit. Taxpayers may be able to claim a credit for certain improvements other than fuel cell property expenditures made to a second home that they live in part-time and don’t rent to others.

The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for a home in the United States installed anytime from 2022 through 2033.

Qualified expenses include the costs of new, clean energy equipment such as:

  • Solar electric panels.
  • Solar water heaters.
  • Wind turbines.
  • Geothermal heat pumps.
  • Fuel cells.
  • Battery storage technology (beginning in 2023).

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

  • Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
  • Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
  • Battery storage technology must have a capacity of at least 3-kilowatt hours.

The credit is available for qualifying expenditures incurred for installing new clean energy property in an existing or newly constructed home. This credit has no annual or lifetime dollar limit except fuel cell property. Taxpayers can claim this credit each tax year they install eligible property until the credit begins to phase out in 2033.

This is a nonrefundable credit, which means the credit amount received cannot exceed the amount owed in tax. Taxpayers can carry forward any excess unused credit and apply it to any tax owed in future years.

Taxpayers should use Form 5695, Residential Energy Credits, to claim the credit. This credit must be claimed for the tax year when the property is installed, not just purchased.

Keeping Good Records is Essential

Taxpayers are reminded that it is important to keep all receipts and records of purchases and expenses when the improvements are made to assist them in claiming the applicable credit during tax filing season. If you have any questions about home energy tax credits, please call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Refundable vs. Non-refundable Tax Credits

Tax credits can reduce your tax bill or give you a bigger refund, but not all tax credits are created equal. While most tax credits are refundable, some credits are nonrefundable. Still, before we look at the difference between refundable and nonrefundable tax credits, it’s important to understand the difference between a tax credit and a tax deduction.

Understanding the Difference between a Tax Credit and a Tax Deduction

Tax credits reduce your tax liability dollar for dollar and are more valuable than tax deductions that reduce your taxable income and are tied to your marginal tax bracket. Let’s look at the difference between a tax credit of $1,000 and a tax deduction of $1,000 for a taxpayer whose income places them in the 22% tax bracket:

  • A tax credit worth $1,000 reduces the amount of tax owed by $1,000 – the same dollar amount.
  • A tax deduction worth the same amount ($1,000) only saves you $330, however (0.22 x $1,000 = $220). As you can see, tax credits save you more money than tax deductions.

Tax Credits: Refundable vs. Nonrefundable

A refundable tax credit reduces the federal tax you owe and could result in a refund if it is more than you owe. Let’s say you are eligible for the Child Tax Credit for $1,000 but only owe $200 in taxes. The additional amount ($800) is treated as a refund.

A nonrefundable tax credit means you get a refund only up to the amount you owe. For example, if you are eligible to take an American Opportunity Tax Credit worth $1,000 and the amount of tax owed is only $800, you can only reduce your taxable amount by $800 – not the full $1,000.

Examples of Refundable Tax Credits

  • The Earned Income Tax Credit
  • Additional Child Tax Credit
  • Premium Tax Credit

Nonrefundable Tax Credits

Examples of nonrefundable tax credits include:

  • Adoption Tax Credit
  • Electric Vehicle Tax Credit
  • Foreign Tax Credit
  • Mortgage Interest Tax Credit
  • Residential Energy Property Credit
  • Credit for the Elderly or the Disabled
  • Credit for Other Dependents
  • The Saver’s Credit

Partially Refundable Tax Credits

Some tax credits are only partially refundable such as:

  • Child Tax Credit (fully refundable in 2021 and 2022)
  • American Opportunity Tax Credit

Questions About Tax Credits or Deductions?

If you have any questions or want more information about these tax topics, please call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Five Overlooked Tax Breaks for Individuals

Are you confused about which credits and deductions you can claim on your 2022 tax return? You’re not alone. With tax law becoming more complicated every year, it’s hard to remember which tax breaks are available in any given year. With that in mind, here are five tax breaks you might not want to overlook.

1. State Sales and Income Taxes

The IRS allows for a deduction of either state income tax paid or state sales tax paid, whichever is greater. As an individual, your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). If you bought a big ticket item like a car or boat in 2022, deducting the sales tax might be more advantageous, but don’t forget to figure out any state income taxes withheld from your paycheck, just in case. If you’re self-employed, you can include the state income paid from your estimated payments. In addition, if you paid state tax when filing your 2021 tax return in 2022, you can include that amount in the state tax deduction on your 2022 federal tax return this year.

2. Child and Dependent Care Tax Credit

Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. The child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent such as an elderly parent who is physically or mentally unable to care for him or herself. The credit is worth a maximum of $1,050 or 35% of $3,000 of eligible expenses per dependent. For two or more qualifying children, the credit can be up to $6,000.

3. Student Loan Interest Paid by Parents

Typically, a taxpayer can only deduct interest on mortgages and student loans if they are liable for the debt; however, if a parent pays back their child’s student loans, the IRS treats the money as if the child paid it. As long as the child is not claimed as a dependent, they can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.

4. Medical Expenses

Most people know medical expenses are deductible if they are more than 7.5% of AGI for tax year 2022. They often don’t realize which medical expenses can be deducted, such as medical miles driven to and from appointments and travel (airline fares or hotel rooms) for out-of-town medical treatment. For 2022, these amounts are 22 cents per mile from July 1-December 31, 2022, and 18 cents per mile from January 1-June 30, 2022. For tax year 2023, the rate is 22 cents per medical mile driven.

Other deductible medical expenses that taxpayers might not be aware of include: health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.

Self-employed individuals. If you’re self-employed, you can deduct the amount of your entire health insurance premium, and if you pay health insurance premiums for an adult child under age 27, you may be able to deduct them as well. Self-employed individuals aged 65 or older can also deduct the amounts paid for medicare premiums as long as they do not have a regular job covered under their (or their spouse’s) employer’s health care plan.

5. Bad Debt

If you’ve loaned money to a friend but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 annually. To qualify, however, the debt must be totally worthless in that there is no reasonable expectation of payment. Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.

If you think you qualify for these tax breaks but aren’t sure, help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500