What You Need to Know
Signed into law by President Biden on August 16, 2022, this bill looks a bit different from its predecessor, the Build Back Better Act. The Inflation Reduction Act aims to address issues of rising inflation and climate change. Here are some of the key tax-related provisions that may impact you.
Energy Tax Credits
The Inflation Reduction Act includes several energy provisions. Below are some of the highlights for individuals.
- The bill brings back the Nonbusiness Energy Property Credit under a new name, the Energy Efficient Home Improvement Credit.
- This revised credit would be equal to 30% of the costs of all eligible energy-efficient home improvements made during the year. It would also expand to cover certain other improvements, and the $500 lifetime limit would be replaced by a $1,200 annual limit.
- Qualified energy property includes appliances, such as water heaters, heat pumps and central air conditioners, as well as improvements, such as insulation, exterior doors and exterior windows.
- This revised credit would be extended through 2032.
- The Residential Clean Energy Credit would replace the Residential Energy Efficient Property Credit and would be extended through 2034.
- The credit is applied to the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate temperature in the home.
- The credit would be 30% of qualifying expenses from 2022 to 2032 then fall to 26% for 2033 and 22% for 2034.
- The bill renewed the $7,500 electric vehicle tax credit starting in January 2023 through the end of 2032 and added a credit worth up to $4,000 for used electric vehicles.
- The new credit removes the vehicle cap on manufacturers so that they have access to unlimited credits if they follow the requirements of the bill.
- The credit can be applied upfront at the point of sale if purchased from a dealer so that you don’t have to wait until you file your return to receive the benefit.
- There are some new requirements that disqualify some electric vehicles from the credit. Such requirements include that the vehicle must be assembled in North America and certain battery minerals must come from the U.S. or a country with a free trade agreement. The cars must also cost less than $55,000 ($80,000 for SUVs and trucks) to qualify (this requirement will eliminate popular vehicles, such as the Tesla Model S and Model X).
- There will also be income limitations to participate in the new vehicle credit — adjusted gross income of $150,000 for individuals or $300,000 if married filing jointly.
- The used vehicle credit requires the vehicle price to be under $25,000.
Individual Income Tax Provisions
- The bill extends the current limitation on individuals for excess business losses arising from an active business. This limits the amount of business losses that can offset nonbusiness income.
- The current limits are $270,000 per individual, which is indexed for inflation each year.
- This law is extended from January 1, 2027, through January 1, 2029.
- The Inflation Reduction Act extends the expansion of the Affordable Care Act (ACA) premium tax credit subsidies. These subsidies make healthcare more affordable for many Americans and are set to expire at the end of 2022.
- Under the Inflation Reduction Act, these subsidies would be extended three years, through 2025.
The bill provides $80 billion in IRS funding over a ten-year period. The funding is specifically designated for enforcement efforts, taxpayer services, operations support and modernization. This includes funding for the development of a free direct e-file tax return system.
Most of the changes begin in the 2023 tax year. Creative Planning will continue to monitor potential tax law changes and keep you up to date. Please reach out to your wealth manager with any questions you have surrounding these potential tax law changes or for guidance on any other financial matter.
For those interested in reading the full legislative text of the Inflation Reduction Act, you may do so here.