On August 16, 2022 President Biden signed the Inflation Reduction Act of 2022 into law. The law approves more than 700 billion dollars in federal investments aimed at reducing the national deficit, combating climate change, and lowering health care costs. This historic law lowers-costs for families, creates good-paying jobs for workers, and grows the economy from the bottom up and the middle out.
It will also lower prescription drug costs, energy costs and the deficit. Besides that it will tackle the climate crisis and ask the ultra-wealthy and corporations to pay their fair share and no-one making under $400,000 per year will pay a penny more in taxes.
On August 16, 2022 President Biden signed the Inflation Reduction Act of 2022 into law. The law approves more than 700 billion dollars in federal investments aimed at reducing the national deficit, combating climate change, and lowering health care costs. This historic law lowers costs for families, creates good paying jobs for workers, and grows the economy. For the first time ever, the Inflation Reduction Act establishes Make it in America provisions for the use of American-made equipment for clean energy production.
It asks the ultra-wealthy and corporations to pay their fair share and no-one making under $400,000 per year will pay a penny more in taxes.
The incentives and various qualification requirements kick in according to different timelines. Here’s one example next when purchasing a vehicle and what is required to get the benefit.
Used vehicles purchases qualify for the new federal tax break starting in 2023. This “credit for previously-owned clean vehicles” is available to the end of 2032. Consumers in the market for a used vehicle may wish to wait until 2024 or later.
Timing for a new electric car is more complex. In the bill it stipulates that the final assembly of the new car must take place in North America to get the incentive.
Below are some thoughts as to how the law can possibly affect you.
Health Care and costs:
- Medicare beneficiaries could see their prescription drug costs go down because of the provision allowing Medicare to negotiate prescription drug costs and Medicare beneficiaries with diabetes will benefit from a guarantee that their insulin costs are capped at $35 for a month’s supply.
- Medicare Part D costs at the pharmacy are capped at $2,000 per year.
- 13 million Americans will continue to save an average of $800 per year on health insurance premiums and on the Affordable Care Act it will extend health insurance premium subsidies.
Lowering Energy Costs
- Families that take advantage of clean energy and electric vehicle tax credits will save more than $1,000 per year.
- $14,000 in direct consumer rebates for families to buy heat pumps or other energy efficient home appliances, saving families at least $350 per year.
- 7.5 million more families will be able install solar on their roofs with a 30% tax credit, saving families $9,000 over the life of the system or at least $300 per year. Note; The enhanced residential clean energy credit is retroactive to the beginning of 2022. So, solar panel installations and other qualifying projects completed between Jan. 1, 2022 and the end of 2032 qualify for the 30% credit. Those finished in 2033 and 2034 qualify for lesser credits — 26% and 22%, respectively.
- Up to $7,500 in tax credits for new electric vehicles and $4,000 for used electric vehicles, helping families save $950 per year.
- Note: The Inflation Reduction Act also creates two rebate programs tied to clean energy and efficiency: one offering up to $8,000 and another up to $14,000.
- Unlike some of the tax credits, these rebates are designed to be offered at the point of sale — meaning upfront savings for consumers.
One catch: They likely won’t be broadly available until the second half of 2023 or later, according to experts. That’s because the Energy Department must issue rules governing these programs; states, which will administer the rebate programs, must then apply for federal grants; after approval, they can start issuing rebates to consumers.
Clean Energy uses:
- To power homes, businesses, and communities with much more clean energy by 2030, including:
- 950 million solar panels120,000 wind turbines
- 2,300 grid-scale battery plants
- Advance cost-saving clean energy projects at rural electric cooperatives serving 42 million people.
- Strengthen climate resilience and protect nearly 2 million acres of national forests.
- Creating millions of good-paying jobs making clean energy in America.
Reducing Harmful Pollution
- Reduce greenhouse gas emissions by about 1 gigaton in 2030, or a billion metric tons – 10 times more climate impact than any other single piece of legislation ever enacted.
- Deploy clean energy and reduce particle pollution from fossil fuels to avoid up to 3,900 premature deaths and up to 100,000 asthma attacks annually by 2030.
Lowering Costs for Small Businesses and Expanding Economic Opportunities
The Inflation Reduction Act will reduce costs for small businesses by maintaining lower health care costs, supporting energy-saving investments, and bolstering supply chain resiliency.
Cutting Energy Costs for Small Businesses. The Inflation Reduction Act includes a number of provisions that will save small business owners money on energy costs:
- Small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power – lowering operating costs and protecting against the volatile energy prices that are currently squeezing small businesses.
- Small business building owners can receive a tax credit up to $5 per square foot to support energy efficiency improvements that deliver lower utility bills.
- Small businesses that use large vehicles like trucks and vans will benefit from tax credits covering 30% of purchase costs for clean commercial vehicles, like electric and fuel cell models.
- Doubling the Research and Development (R&D) Tax Credit for Small Businesses.
- Boosting American Manufacturing and Competitiveness. Make it in America. The Act opens opportunities up for small businesses and invests in American workers and industry by spurring U.S. supply chains across technologies like solar, wind, carbon capture, and clean hydrogen. There are also increased Clean energy tax credits if the amount of American steel used in wind projects meets the domestic content threshold, and bonus credits apply to employers who use of prevailing wages and apprenticeships.
- Clean energy tax credits will be increased by 10% if the clean energy projects are established in communities that have previously relied upon the extraction, processing, transport, or storage of coal, oil, or natural gas as a significant source of employment.
TAXES:
Making the Tax Code Fairer
- 15%: the minimum tax on corporate profits the Inflation Reduction Act imposes on the largest, most profitable corporations.
- $124 billion: savings over 10 years the Inflation Reduction Act will generate from collecting taxes already owed by wealthy people and large corporations, according to the Congressional Budget Office.
- And no family making less than $400,000 will see their taxes go up a penny.
- Note: One caveat: Since these are tax credits, consumers will only get the financial benefit when they file their annual tax returns.
- Imposing a 1% surcharge on corporate stock buybacks, to encourage businesses to invest instead of enriching CEOs or funneling profits tax-free to shareholders.
- Making transformational investments in taxpayer service so that regular Americans can get their questions answered and access the credits and benefits they are entitled to.
Reducing the Deficit:
- The Inflation Act will achieve hundreds of billions in deficit reduction.
- The deficit is projected to fall by more than $1.5 trillion this year after falling by more than $350 billion last year.
- 126 leading economists – including 7 Nobel Laureates, 2 former Treasury Secretaries, 2 former Fed Vice Chairs and 2 former CEA Chairs – have said reducing the deficit will help fight inflation and support strong, stable economic growth.
Create jobs:
Protects Public Health: It recognizes that climate change disproportionately impacts low-income community and communities of color. The law creates environmental justice block grants, a dedicated program to tackle pollution in port communities – where air pollution is especially dense and deadly and funds a range of programs to reduce air pollution and protects our chidden and young adults with investments to monitor and reduce greenhouse gas emissions and other air pollutants at public schools in disadvantaged communities.
Strengthen resilience to climate change: It bolsters climate resilience and strengthens the nation’s infrastructure and economy against natural disaster and extreme weather events y upgrading affordable housing, expanding USDA’s Urban and Community Forestry Program and advancing transportation equity and resilience with a new Neighborhood Access and Equity Grant program to improve Walkability, safety, and affordability, including projects to protect against extreme heat, flooding and other impacts.
- Support American workers with targeted tax incentives aimed at manufacturing U.S.-sourced products such as batteries, solar, and offshore wind components, and technologies for carbon capture systems.
- Strengthen America’s manufacturing base. The Inflation Reduction promotes domestic sourcing and American jobs. For example, clean energy tax credits are increased if the amount of American steel used in wind projects meets the domestic content threshold, and bonus credits apply to employers who use of prevailing wages and apprenticeships, ensuring that federal tax policy supports good-paying, high-skilled jobs.
- Create good-paying union jobs in energy communities. Clean energy tax credits will be increased by 10% if the clean energy projects are established in communities that have previously relied upon the extraction, processing, transport, or storage of coal, oil, or natural gas as a significant source of employment, creating jobs and economic development in the communities that have powered America for generations.
In a nutshell:
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.
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.
