You’re probably not thinking much about taxes right now, in part because inflation has you paying high prices for essentials like food, clothing, and gas. But you may have heard that President Biden recently signed the Inflation Reduction Act of 2022, a sweeping piece of legislation that is designed to address some of the significant issues that the U.S. is facing.
SEE MORE How Inflation Can Impact Your Taxes
Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and, yes, hopefully inflation. Proponents of the new law say that its various provisions for fighting climate change, supporting clean energy production, and raising tax revenue, will reduce the deficit and in turn, combat inflation. And some of the expanded tax credits in the legislation could benefit you.
President Biden signed the Inflation Reduction Act on August 16. So, it’s good to have information about how the new law might impact your taxes.
[Yours free, download The Kiplinger Tax Letter August 18 issue for more details on how the Inflation Reduction Act will affect you, your clients, or your business.]
Small Business and Middle-Class Income Taxes
The first piece of relatively good news for most of us is that the Inflation Reduction Act is not designed to increase taxes on small businesses or on families that make $400,000 or less. However, whether that would be the actual tax effect remains to be seen. But for now, Democratic lawmakers who backed the legislation say that it will not raise taxes on small business or middle-income families.
SEE MORE Capital Gains Tax on Real Estate
Instead, under the legislation, some corporations pay more tax than they currently pay. For example, under the new law, large businesses with more than $1 billion in reported income, would pay a minimum corporate tax rate of 15%. Right now, some very large companies that you may be familiar with, like Nike or Amazon for example, pay very little in federal taxes. The Inflation Reduction Act also includes a 1% excise tax on corporate stock buybacks.
Affordable Care Act Premium Tax Credits
The new law also extends the expanded Affordable Care Act (ACA) program through 2025, so that eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to benefit from lower health care premiums
Eligibility for the ACA premium tax credit program was temporarily expanded during the pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022.
[For more information about how the new law will impact ACA premiums, see Inflation Reduction Act Will Boost Obamacare Tax Credit.]
Clean Energy Tax Credits for Homeowners
To support clean energy, the Inflation Reduction Act will, in some cases, provide new tax credits. Other energy-related tax credits will be extended—some of which could benefit homeowners.
For example, the legislation includes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. That tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.
Affordable housing could also get a boost because the Inflation Reduction Act would create a $1 billion incentive program for energy-efficient affordable housing.
[For more information about how the new law will impact homeowner tax credits, see You'll Save More on Green Home Improvements Under the Inflation Reduction Act.]
Electric Vehicle Tax Credits
The Inflation Reduction Act also contains provisions for electric vehicle tax credits. Essentially, existing tax credits for buying a new or used electric vehicle are extended for 10 years—until December 2032. Those credits will apply to any “clean vehicle,” which, for example, now includes hydrogen fuel cell cars.
The law sets income limits on who can claim the electric vehicle credits, and limits based on the manufacturers retail sales price (MSRP) of the cars that would qualify for the credit. Those limits effectively exclude higher-priced luxury electric vehicles. The new law also removes the 200,000-car cap for claiming the credit, which will allow manufacturers like Tesla, General Motors, and Toyota to qualify for the credit.
Also, there will be an option, beginning in 2024, for car buyers to take the clean vehicle tax credit as a discount at the time of the car purchase. You would effectively be transferring the credit to the dealer who could reduce the price of the vehicle by the amount of the EV tax credit. That means that you wouldn’t have to wait until tax time to benefit from the clean vehicle tax break.
[For more information about how the new law will impact EV tax credits, see EV Tax Credits Are Changing: What’s Ahead.]
IRS Tax Enforcement
The Inflation Reduction Act includes $80 billion of additional funding over ten years for the IRS.
It’s not clear at this point exactly how that money will be spent, but lawmakers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This might include boosting staffing levels and modernizing outdated processing systems ($5 billion is allotted in the bill for technology). Another $25 billion of the additional funding is intended to improve IRS operations.
[For more information about IRS enforcement in the Inflation Reduction Act, see Is an Army of New IRS Agents Coming for Your Tax Dollars?]
As you can see, the Inflation Reduction Act makes some interesting changes to current tax credits that impact some homeowners and car buyers. It also shifts some longtime tax policy—particularly for some large corporations.
And while all the proposed tax changes in the proposed legislation may not impact your personal tax bill, a few extended tax credits might save you some money at tax time. Additionally, the new law contains provisions that could allow Medicare to negotiate lower prices for some prescription drugs.
So, stay tuned for regulations and updates on The Inflation Reduction Act of 2022.