On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) into law. This law includes new tax provisions, extensions, and expansions of tax benefits related to energy efficiency and healthcare.
What does the Inflation Reduction Act of 2022 mean for you and your taxes? Well, this is all pretty new, but we’re pretty confident that we can help get you up to speed. Waters Hardy specializes in personal accounting and tax preparation services, so we’ve taken the time to learn as much as we can, as fast as possible, to pass this information on to you. The more you understand what the new Inflation Reduction Act is all about, the more you can recognize and take advantage of the new tax benefits.
What is the Inflation Reduction Act?
The Inflation Reduction Act is a $700 billion-plus climate, health care, and tax legislation package. This landmark decision aims to control inflation by reducing the deficit, lowering prescription drug prices, and promoting clean energy by investing in domestic energy production. With $270 billion allocated for energy tax incentives and clean energy, the law represents the most significant investment into addressing climate change in United States history.
Inflation Reduction Act Tax Implications
Energy Efficient Tax Benefits
Clean Vehicle Credit
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- Before the IRA of 2022, people could claim a credit of up to $7,500 for the purchase of a new electric vehicle. The Clean Vehicle Credit now has a different name, but the credit is still the same.
- Starting in January 2023, depending on income, people purchasing used electric vehicles may be eligible for a tax credit of $4,000 or 30% of the sales price, whichever is lesser.
- Effective as of August 17, 2022, new electric vehicles must receive final assembly in North America, unless there was a binding contract in place before the signing of the Inflation Reduction Act.
- Specific to business owners, the IRA adds a tax credit of up to $7,500 for new commercial clean vehicles after December 31, 2022.
Electric Chargers Credit
Initially, a tax credit was available for electric charging stations by a business or home prior to January 1, 2022. The Inflation Reduction Act has extended the credit for charging stations put in service before January 1, 2033.
Energy credits for the home
If the property is put into service before January 1st, 2023, the credit amount for non-business energy property, such as windows, doors, and skylights, increases from 10% to 30%.
Solar energy
Credit for energy-efficient equipment such as solar panels and solar water heaters for the home increased from 26% to 30%, if purchased between January 1, 2022, through December 31, 2032.
Healthcare Tax Benefits
Premium Tax Credit
Premium Tax Credit extends healthcare subsidies if health insurance is purchased in the Health Insurance Marketplace, lowering premiums if you don’t receive enough subsidy based on your income. Individuals whose income exceeds 400% of the federal poverty level will be eligible for benefits.
Medicare
For Medicare beneficiaries, out-of-pocket prescription drug expenses will be capped at $2,000 per year. Additionally, Medicare will be allowed to negotiate some of the more expensive drugs on the market.
Corporate Tax Changes
New Minimum Tax
Corporations with an annual income over $1 billion will pay a new minimum tax. If 15% of financial statement income results in a higher tax than the traditional tax imposed on taxable income. This new corporate tax change is estimated to raise $222 billion.
Excise Tax
Corporations will pay a 1% excise tax on publicly traded companies on the excess of repurchased corporate stock over any new issues to employees or the public. Therefore, this excludes corporate net buybacks if the amount is less than $1 million. The new excise tax imposed on corporations is estimated to raise $74 billion.
Internal Revenue System Allocations
Nearly $80 billion, distributed over a 10-year period, has been allocated to the IRS through another major provision to raise revenue. The funds will be used to enhance business system modernization, operations support, and enforcement efforts. About $45.6 billion of these funds must be used to determine and collect owed taxes, provide legal support, conduct criminal investigations, and provide digit asset monitoring and other compliance-related activities. This new tax law is estimated to add roughly $124 billion in revenue.
Partnerships, S corporations, and LLCs Tax Changes
A lesser-known provision that now applies limits excess business losses for business owners operating as sole proprietors or pass-through entities. The complex tax rule generally limits a taxpayer’s ability to offset employment or investment income with a business loss. Extending this provision until the end of 2028 is estimated to raise $54 billion in taxes.
Waters Hardy Guarantees the Best Service for Tax Preparation
The “deficit reduction” provisions can occasionally be confusing and difficult to understand. This can cause you to wonder if there are any potential tax advantages that you might be overlooking. In short, the majority of proposed tax increases on individuals were not included in the final bill, meaning that there are no changes to individual income tax rates or estate and gift tax rates. The most significant tax increases will mostly impact large corporations. However, this doesn’t mean your tax situation is not worth evaluating.
It’s important to work with a professional to ensure that you are fully utilizing all the different ways that these changes affect your tax situation. Our team at Waters Hardy is knowledgeable and has vast experience in matters related to tax law. With special attention to tax preparation and compliance, we can review your situation and find ways to make these tax benefits work for you.
Find out more about how this new legislation could impact your personal accounting tax strategy. Contact us today.