The Inflation Reduction Act (IRA) was signed into law on August 16, 2022. Here are the significant provisions:
- Creation of a 15% corporate minimum tax rate: Corporations with at least $1 billion in income will have a new tax rate of 15%. Taxes on individuals and households won’t be increased. Stock buybacks by corporations will face a 1% excise tax.
- Prescription drug price reform: The IRA will allow Medicare to negotiate the price of certain prescription drugs. Medicare recipients will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025.
- IRS tax enforcement: The IRA invests $80 billion in the IRS over the next 10 years.
- Affordable Care Act (ACA) subsidy extension: Currently, medical insurance premiums under the ACA are subsidized by the federal government to lower premiums. These subsidies, which were scheduled to expire at the end of this year, will be extended through 2025.
- Energy security and climate change investments: The IRA includes tax credits for households to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions.
How the Inflation Reduction Act impacts you when filing your next tax return.
- Extension of Affordable Care Act (ACA) funding through 2025. This funding, which was due to expire at the end of 2022. This 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 IRA 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.
Under prior law Residential Energy Efficient Property includes qualified expenditures for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes.
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 IRA extends the Clean Vehicles 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 in total for the purchase of new qualified commercial clean vehicles. Final assembly of qualifying electric vehicles must be in North America. The clean vehicle credit is capped at $3,750 for meeting the critical minerals requirement and $3,750 for meeting the battery component requirement (among other requirements). No credit is allowed for cars with a manufacturer’s suggested retail price over $55,000 ($80,000 for vans, sport utility vehicles and pickups).
- $40,000 for vehicles over 14,000 pounds. This new credit per qualified commercial clean vehicle is the lesser of: (1) 15% of the vehicle’s basis (30% for vehicles not powered by a gasoline or diesel engine) or (2) the vehicle’s “incremental cost” over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. A qualified vehicle must be acquired by the taxpayer for business (not for resale) for use on public streets, roads, and highways, or be “mobile machinery”; and
- the lesser of 30 percent of the price of used electric vehicles or $4,000. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
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 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.
Alternative Fuel Vehicle Refueling Property Credit
Under prior law, a credit equal to 30% of the cost of any qualified alternative fuel vehicle refueling property placed in service by a trade or business or at a taxpayer’s principal residence was available for property placed in service before 2022. The credit was limited to $30,000 for all business property annually and $1,000 for personal property. This credit has been extended for property placed in service during 2022.
The IRA provides that Property placed in service after 12/31/22 and before 2033 will be entitled to:
A credit equal to 6% (increasing to 30% if certain conditions are met) of the cost of any qualified alternative fuel vehicle refueling property is available. The credit is limited to $100,000 per single item. Eligible property includes bidirectional charging equipment and electric charging stations for two- and three-wheeled vehicles for public road use.
Charging or refueling property is only eligible if placed in service in a low-income or rural census tract.
Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities
Under pre-IRA a “qualified small business” (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
Additional information related to this Act will be forthcoming. We’ll keep you up to date on the developments that could impact you.