You may have heard that President Biden signed the Inflation Reduction Act of 2022, a sweeping bill to address U.S. issues.
The bill aims to:
- Cut the deficit
- Invest in domestic energy and manufacturing
- Reduce carbon emissions by 40 percent by 2030
- Allow Medicare to bargain for lower prescription drug prices
- Extend the expanded Affordable Care Act program for three years, until 2025
- Potentially raise corporate and carried interest taxes
The Inflation Reduction Act is a scaled-back version of 2021’s “Build Back Better Act” with only a few of the Build Back Better Act’s tax proposals made it into the new bill.
So how will the new Inflation Reduction Act affect our taxes?
Middle-Class and Small Business Taxes
First, the Inflation Reduction Act won’t raise taxes on small businesses or $400,000-or-less families. If and when the bill becomes law, its tax impact is unknown. Lawmakers who support the bill say it won’t raise taxes on small businesses or middle-income families.
Some corporations pay more tax under the law. Large businesses with more than $1 billion in reported income would pay a minimum 15% corporate tax rate. Nike and Amazon pay very little in federal taxes. The Inflation Reduction Act also taxes stock buybacks at 1%.
Credits for Affordable Care Act (ACA) Premiums
During the pandemic, ACA premium tax credit eligibility was temporarily expanded for 2021 and 2022.
The bill extends the expanded ACA program through 2025 so eligible individuals and families can continue to benefit from lower health care premiums.
Homeowners’ Clean Energy Tax Credits
The Inflation Reduction Act may provide new tax credits for clean energy.
Some homeowner tax credits will be extended. As an example, the legislation extends the homeowner solar credit by 10 years. Tax credits are also available for energy-efficient water heaters, heat pumps, and HVAC systems.
Inflation Reduction Act would create $1 billion incentive program for energy-efficient affordable housing.
Electric Vehicle Tax Credits
Inflation Reduction Act includes EV tax credits. Tax credits for new or used electric vehicles are extended until December 2032. These credits apply to any “clean vehicle,” including fuel cell cars.
The law sets income and MSRP limits for who can claim electric vehicle credits. These limits exclude luxury EVs. The new law removes the credit’s 200,000-car cap, allowing Tesla, GM, and Toyota to qualify.
Car buyers can take the clean vehicle tax credit as a discount beginning in 2024. You’d be transferring the credit to the dealer, who could reduce the vehicle’s price. You don’t have to wait until tax time to get the clean vehicle tax break.
IRS Tax Compliance
The Inflation Reduction Act gives the IRS $80 billion over ten years. Legislators expect the IRS to use $45 billion to improve tax enforcement. This may include increasing staffing and modernizing outdated processing systems ($5 billion is allocated for technology). Another $25 billion is for IRS improvements.
Watch Out for More Updates
The Inflation Reduction Act changes some homeowner and car buyer tax credits. It changes tax policy, especially for large corporations.
While not all proposed tax changes will affect your tax bill, a few extended tax credits may save you money. The new law may allow Medicare to negotiate lower drug prices.
Let’s watch out for the regulations and more updates about the Inflation Reduction Act of 2022!
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