Inflation Reduction Act – What it Means for Your Taxes
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA). This new law contains a few tax provisions that we believe may impact our clients. A summary of these provisions follows.
Health Insurance Subsidies – The act extends through 2025 the rule allowing taxpayers with household income exceeding 400% of the poverty line a reduced premium tax credit. This only applies to taxpayers who are purchasing their health insurance through the Marketplace. Prior to 2021, taxpayers with household income exceeding 400% of the poverty line were not eligible for health insurance subsidies. Under the new law, subsidies should be calculated so that no one will pay more than 8.5% of their household income for insurance through the Marketplace.
Clean Energy Building Provisions – Credits for energy-efficient home improvements, such as new energy efficient windows, exterior doors and heating and cooling units are extended through 2032. Beginning with the 2023 tax year, these credits are also much more lucrative. Under the old rules, this credit was limited to a $500 lifetime maximum. Because many of our clients previously took advantage of these older credits, they had met the lifetime maximum, making them no longer eligible for any energy tax incentives. Under the new rules, the $500 lifetime maximum is replaced by a $1,200 annual maximum (limited to $600 credit per item). In addition, the credit is now calculated as 30% of the cost of the improvement (including the cost of installation). One thing to note is that the new provisions of the credit apply only to projects completed in 2023 or later. Due to the new provisions being more lucrative, it may be advisable to delay any new projects until 2023.
Additionally, the separate credit for residential energy-efficient property (such as solar panels and geothermal systems) was also extended through 2034. The credit is not subject to an annual maximum and will continue to be calculated as 30% of the project cost through 2032. The credit rate decreases to 26% of project costs in 2033 and then 22% in 2034.
Clean Vehicle Provisions – Available tax credits for the purchase of a new clean vehicle continue to be a maximum of $7,500. Additional restrictions have been added to the credit to ensure that the vehicle and its major components are manufactured within the United States. Eligible vehicles also must have a manufacturer’s suggested retail price less than $55,000 ($80,000 for vans, SUVs and pickup trucks) to be eligible. Restrictions have also been added so that married taxpayers with income exceeding $300,000 ($150,000 single taxpayers) are not eligible. This credit remains available through 2032.
In addition to the credit for new clean vehicles, taxpayers can also claim a credit for 30% of the price for previously owned clean vehicles purchased after December 31, 2022. The maximum credit is limited to $4,000. To be eligible for the credit, the taxpayer must have income less than $75,000 ($150,000 married). The credit is only available for vehicles with a sales price less than $25,000 and is only valid for the first resale of the vehicle. Like the new vehicle credit, this credit remains available through 2032.
This is short summary of some of the tax provisions of the new law. For any questions or for further information, please contact us!