How could the Inflation Reduction Act impact you when filing your next tax return?

Below is a simplified summary of how the Inflation Reduction Act may affect you.

Health Care

The Inflation Reduction Act includes:

• Extension of Affordable Care Act (ACA) funding through 2025. This funding, which was due to expire at the end of 2022, will allow consumers to continue to buy insurance with lower premiums through the Health Insurance Marketplace (also referred to as the Marketplace or the Exchange).
• Extension of the American Rescue Plan Act (ARPA) temporary exception that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit.

Energy Efficient Home Improvement Credit

The Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit.

Starting in 2023, the credit will be equal to 30 percent of the costs of all eligible home improvements made during the year. Additionally:

• The $500 lifetime limit on the total credit amount will be replaced with a $1,200 annual limit.
• The annual limits for specific types of qualifying improvements will be:
  • $150 for home energy audits;
  • $250 for any exterior door ($500 total for all exterior doors) that meet applicable Energy Star requirements;
  • $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
  • $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
  • $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This category of improvement is not limited by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
  • Roofing will no longer qualify.

For eligible home improvements using products placed in service after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the product and the taxpayer claiming the credit includes the number on his or her return for that tax year.

Note: For 2022, the prior credit rules apply.

Residential Clean Energy Credit

The Residential Energy Efficient Property Credit, now called the Residential Clean Energy Credit, was previously scheduled to expire at the end of 2023 but has been extended through 2034. The Inflation Reduction Act also increased the credit amount, with a phaseout of the applicable percentage.

Amount of Credit:

• 30 percent for 2023-2032;
• 26 percent for 2033; and
• 22 percent for 2034.

The credit no longer applies to biomass furnaces and water heaters, now covered under the Energy Efficient Home Improvement Credit. Starting in 2023, however, the new credit will apply to battery storage technology with a capacity of at least three kilowatt hours.

Clean Vehicle Credits

The Inflation Reduction Act extends the Clean Vehicle Credit until the end of 2032 and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles.

Tax credits include up to:

• $7,500 for the purchase of new qualified commercial clean vehicles;
• $40,000 for vehicles over 14,000 pounds; and
• the lesser of 30 percent of the price of used electric vehicles or $4,000.

Limitations apply based on the manufacturer’s suggested retail price of the vehicle. There are also limitations for the new vehicle credit based on adjusted gross income (AGI) thresholds – for single or married filing separately taxpayers, the limit is $150,000; for taxpayers filing as head of household, the limit is $225,000; and for married filing jointly, or surviving spouse taxpayers, the limit is $300,000. Reduced AGI limitations apply to the used vehicle credit.

Starting in 2024, the Inflation Reduction Act establishes a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price.

Taxes and IRS Funding

The Inflation Reduction Act also includes:

• 15 percent minimum tax on corporations with over $1 billion in revenue;
• 1 percent excise tax on corporate share buybacks; and
• About $79 billion of additional funding over ten years for the IRS.

The IRS is preparing a plan showing how it expects to use the additional funding. In a recent letter to all Members of the Senate, IRS Commissioner Charles Rettig stated, “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans…Other resources will be invested in employees and IT systems that will allow us to better serve all taxpayers, including small businesses and middle-income taxpayers.”

More information

The Inflation Reduction Act makes these and several additional changes to the Internal Revenue Code.  While these changes may not impact your individual tax bill, the extended tax credits may save you money at tax time.

Have a question? Contact NTA.