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Will the Inflation Reduction Act Affect Your Income Taxes?


Recently signed by President Joe Biden, this new legislation comes with some tax law changes that may affect you.

There’s been no shortage of discussion on Capitol Hill over the last few months over the Inflation Reduction Act. This is a slimmed-down version of the Build Back Better Bill, which never made it out of Congress. President Joe Biden sign it into law on August 16, 2022.

What does this mean for you? It depends. Major provisions in the new law were designed to address climate change and slow down the trajectory of global warming. This translates into green energy credits for your home and vehicle. Other elements that affect individual taxpayers relate to health care. For example, are you on Medicare and take certain medications? Do you count on premium assistance for Affordable Care Act coverage?

The legislation will affect large corporations in a big way (a new 15% minimum corporate tax and a 1% excise tax on stock buybacks), but it will also have impact on some smaller businesses. Have you experienced problems getting through to the IRS with questions or problems? Do you have concerns about how the federal budget deficit could affect your taxes?

Let’s look at these new provisions.

Green Energy Tax Credits

If you have bought or are planning to buy energy-efficient doors and windows and appliances (air conditioners, water heaters, furnaces, etc.), you may be familiar with the Nonbusiness Energy Property Credit. It expired at the end of 2021 but has been extended through the 2022 tax year. There were numerous restrictions on this credit that may have made you wonder if it was worth the trouble of replacing major household items.

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The Nonbusiness Energy Property Credit was discontinued at the end of 2021 but has been reinstated for the 2022 tax year.

 

The Inflation Reduction Act replaces that old credit with the Energy Efficient Home Improvement Credit. Beginning in tax year 2023, the credit will:

  • Be equal to 30% of all the costs you incur making qualified home improvements.
  • Include your costs for home energy audits, some boilers and biomass stoves, equipment related to electric panels.
  • Not apply to air-circulating fans or roofing.
  • Be subject to updates of the energy-efficiency standards.

Annual limits for some kinds of eligible improvements will be increased. For example, you’ll be able to claim up to $2,000 for some heat pump water heaters, biomass stoves and boilers, and gas heat pumps. You’ll get a $600 credit for energy-saving items like some furnaces and air conditioners, water heaters, and exterior windows ($250 for an exterior door).

There’s no more $500 lifetime limit on energy credits. Rather, you’ll be able to claim up to $1,200 annually. But you’ll be required to provide more purchase documentation after 2024. The manufacturer will have to give you a product identification number for each item you want to claim that will go on your tax return.

The Clean Vehicle Credit

There have been tax breaks for buying electric vehicles since 2009. Internal Revenue Code (IRC) Section 30D (still in force today) allowed tax credits of up to $7,500 for electric vehicles, fuel-cell (hydrogen) vehicles, and plug-in hybrid electric vehicles. This credit is nonrefundable, meaning you can’t claim more than you owe in taxes for the year you bought it and put it into use. If you owe $6,000, for example, that’s the maximum credit you could claim.

 
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IRS Form 8936 for the 2021 tax year

This credit hadn’t changed until the Inflation Reduction Act came along. Congress tried to increase it to $12,000 in the Build Back Better Bill, but that piece of legislation was never passed by the Senate.

The credit remains at $7,500 and has been renamed. It’s now the Clean Vehicle Credit, which will be in place for eligible vehicles put into service after December 31, 2022.

It’s going to be harder to claim the credit because of new provisions in the Inflation Reduction Act. There are two sets of restrictions, one for the first $3,750 and another for the second $3,750. Both have to do with where the materials for batteries are mined and where they’re manufactured. The U.S. isn’t an industry leader on either count, but Congress is working on it.

Other Provisions of the Inflation Reduction Act

Protection of the environment is a critical element of the new legislation, but there’s a lot more that might affect you. For example:

  • Medicare. There will be an out-of-pocket maximum of $2,000 annually for drug costs. Medicare will be allowed to negotiate on a few drug prices in a few years. The number eligible will continue to increase.
  • The Affordable Care Act. Premium assistance has been extended to 2025.
  • Reducing the deficit. The goal is $300 million.
  • New agents added to IRS workforce. 87,000 of them ($80 billion). Many of them will be hired for “enforcement” (audits), but there will be money for improving customer service and general operations.

Many of the details in the Inflation Reduction Act are still not available, but we continue to learn as much as we can. Stay tuned as we all find out more about the impact of this massive new legislation. And remember that we can always meet with you to talk about general income tax planning, no matter what time of year it is.