What You Need to Know About the Inflation Reduction Act

electric car

Just when it seemed that 2022 might pass without any major changes to tax policy at the federal level, seemingly out of nowhere this month Senate Democrats reached an agreement to advance a major piece of legislation that has many tax-related implications.

While the bill, known as the Inflation Reduction Act, doesn’t change federal tax rates for individuals, it does increase taxes for some corporations.  It also provides for tax rebates related to electric vehicles and clean energy, extends subsidies related to health insurance, and increases funding for the IRS.  Let’s take a more detailed look at each of these items.

Tax Credit for Electric Vehicles

One of the provisions in the new law which has grabbed the most headlines is the tax credit to lower the cost of purchasing an electric vehicle.  There are credits for purchasing both new and used electric vehicles, which break down as follows:

  • There is a credit of up to $7,500 for the purchase of a new electric vehicle costing up to $55,000 (or $80,000 in the case of SUVs and vans). The credit is available to anyone earning less than $150,000 annually (or $300,000 for joint filers).
  • For used electric vehicles at least two years old and selling for less than $25,000, there is a tax credit of up to $4,000. This credit is available to filers earning up to $75,000.

As always, there is some fine print that applies to these tax credits.  For example, the tax credit for new vehicles only applies to those produced by “qualified manufacturers”, which in this case means those where the final assembly takes place in North America.  However, the bottom line is that these credits will make buying a new or used electric care more affordable for millions of people.

Green Energy Tax Credits

Although the electric vehicle tax credits got the most attention from the media, the Inflation Reduction Act also includes many tax credits related to home energy usage.  These include:

  • Boosting the credit for installing energy-efficient goods and appliances from 10% to 30% (including heat pumps, electric induction cook-tops, solar panels for electricity and water heating, and small wind energy)
  • Offering $600 for the installation of energy-efficient windows and $500 for doors
  • Offering additional credits for upgrading electrical panels and installing insulation

There are enough home energy tax credits in the bill that just about every homeowner in the country may be able to take advantage of at least one of them to reduce their energy usage.  In fact, if you aren’t sure where to start, there’s even a tax credit of $150 that you can put towards the cost of a home energy audit!

Extended Subsidies for Health Insurance

The new law extends the enhanced funding for the Affordable Care Act which was part of the pandemic relief law passed last year.  This additional funding provided financial assistance for health insurance to middle-income earners.  The funding was set to expire at the end of this year, but it has now been extended three more years to 2025.

Corporate Minimum Tax

Another headline-grabbing item in the Inflation Reduction Act is the new corporate minimum tax.  Although under current law corporations in the U.S. are supposed to be subjected to a tax rate of 21%, many Fortune 500 companies actually pay no tax at all by claiming various credits for research and development.  The new law closes some of the loopholes these corporations use to avoid paying taxes, although they will still be able to claim tax credits related to green energy.

Enhanced IRS Enforcement

Last but not least, the new law provides $80 billion in additional funding for the IRS to help with actually collecting the taxes that people owe and enforcing the tax laws of the country.  By some estimates, this could help bring in much as $1.4 trillion in additional tax revenue from people and businesses who aren’t paying what they should be.

As a result, the IRS will now be able to more thoroughly scrutinize tax returns and conduct more audits, an excellent reason to use a CPA to assist you in preparing and filing your tax return.  Not only can CPAs help you avoid any mistakes, they can also provide support in the case that you are subjected to a routine audit.  If you want assistance understanding how the Inflation Reduction Act or any other tax law applies to your specific situation, contact Cooke, Lavender, Massey & Company, P.C. for a free consultation.