You may have heard of the Inflation Reduction Act, which the Biden Administration signed into law in 2022. But what does it mean for your taxes? Here’s the inside scoop.
What is the Inflation Reduction Act?
The Inflation Reduction Act (IRA) has a lot of different components: from investing in clean energy to reforming prescription drug pricing and even increasing taxes for large corporations.
But when it comes to taxes, there are really just three things individuals and small businesses need to worry about.
- Clean energy tax incentives
- Increased IRS funding
- Affordable Care Act (ACA) extension
1. Clean energy tax incentives
If you’re thinking of going green, now may be the time. The IRA offers more incentives for using clean energy, which means you may get a tax break if you renovate your home or business to be more energy-efficient.
Specifically, you may be able to take advantage of the
- Energy efficient home improvement credit
- Residential clean energy credit
- Electric vehicle tax credit
The energy efficient home improvement credit
With this credit, you can take a credit for 30% of the cost of any qualifying energy-efficient home improvements, such as doors, windows, skylights, and roofing, up to $1200 per year.
There are some specific limits as well, including:
- $250 for one exterior door and $500 total for all exterior doors
- $600 for exterior windows and skylights, central AC, electric panels, natural gas, propane, oil, furnaces, and hot water boilers
- $150 for home energy audits
- $2500 for electric and natural gas heat pumps, water heaters, biomass stoves, and boilers
In 2025, you’ll need to include the equipment manufacturer’s product ID number on your tax return if you want to claim this credit.
The residential clean energy credit
The residential clean energy credit gives you a tax break when you purchase qualifying solar property. You can now claim 30% of the cost to install certain clean-energy systems (such as solar, wind, geothermal heat pumps, and fuel cells) in your home. This credit will be available through 2032, dropping to 26% in 2033 and 22% in 2034.
The electric vehicle tax credit
Thinking about buying an electric car? Great news, you’ll probably get a tax break if you do! The IRA has extended the electric vehicle tax credit through 2032. Here’s what you need to know about the “new” credit:
- It applies to any clean vehicle, which includes hydrogen fuel cell cars, as long as the vehicle’s final assembly took place in North America
- Used electric vehicles driven after 2022 may qualify for the credit
- You can take this credit as a discount when buying the car, rather than waiting for your tax refund
- There are income and retail sale price limits, meaning you may not be able to deduct the full amount if the price or your income is too high
2. Increased IRS funding
One of the components of the IRA is that the IRS will receive $80 billion over 10 years. Why? In 2022, the IRS was backed up with 11 million individual tax returns not yet processed. The new IRA funding should help the IRS beef up its staff, modernize its IT systems, and get through all those returns in a more timely manner.
But wait—do we want the IRS to be more on top of things? Won’t this mean more tax audits? Unless you’re uber wealthy and have something to hide, probably not. According to the Treasury Secretary, the IRS won’t increase audit rates on small businesses or individuals that earn less than $400,000 per year. The IRS will focus instead on large corporations and high net worth individuals.
Actually, an IRS update is good news for those of us who aren’t meeting the million dollar mark, as it should make tax filing smoother and less confusing.
3. Affordable Care Act (ACA) extension
The ACA gives premium tax credits (PCTs) to low- and middle-income households, to help make health insurance coverage more affordable. This credit is refundable, which means you can still claim the full thing even if it’s higher than your tax liability. The IRA has extended the ACA through 2025.
That means that, through 2025, you can now:
- Claim the PCT if your household’s income exceeds 400% of the poverty line, and if you meet all the other requirements
- Claim the PCT if your health insurance premiums exceed 0-8.5% of your household’s taxable income
Have questions about the IRA and how it affects your taxes? Ask Taby or connect with one of our tax professionals.