On August 16, 2022, President Biden signed into law the Inflation Reduction Act. It’s a wide-sweeping bill that addresses climate, health care, and some mix of tax breaks and tax hikes, as well as additional funding for the IRS. Below you’ll find a summary of how the Inflation Reduction Act could affect you.
Health Care
Funding for the Affordable Care Act (ACA) was due to expire at the end of 2022, but the Inflation Reduction Act extends funding through 2025. This will allow eligible individuals to continue to purchase insurance with lower premiums through the federal Health Insurance Marketplace.
The Inflation Reduction Act also extends the temporary exception from the American Rescue Plan Act (ARPA) that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit (PTC). The PTC makes health insurance more affordable by helping eligible consumers pay premiums for coverage purchased through the Health Insurance Marketplace. To get this credit, you can claim the PTC on your tax return, or you can choose to have amounts paid directly to the insurance provider as long as you qualify for advance payments of the premium tax credit.
Energy Efficient Home Improvement Credit
Previously known as the Nonbusiness Energy Property Credit, the renamed Energy Efficient Home Improvement credit was extended through 2032. Beginning next year, the credit will be equal to 30 percent of the costs of all qualified home improvements made during the year. Furthermore:
- A $1,200 annual limit on the total credit amount will replace the current $500 lifetime limit.
- Annual limits for particular types of qualifying home improvements will be as follows:
- $150 for home energy audits;
- $250 for any exterior door ($500 total for all exterior doors) that satisfy appropriate Energy Star requirements;
- $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
- $600 for other eligible energy property, including central air conditioners; electric panels and various similar equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This group of upgrades is not restricted by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
- Roofing and air circulating fans will no longer be eligible for the credit.
So, if you stretch your qualifying home projects over a few years, you can claim the maximum credit each year.
Electric Vehicle Tax Credits
The Inflation Reduction Act extends the Clean Vehicle Credit for ten years — until December 2032 — and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles. Taxpayers can qualify for a credit of up to $7,500 for a new electric car or $4,000 for a used one. However, in order to qualify for the tax credit, electric vehicles must be assembled in North America, and the Biden administration has already prepared a list of 20 EVs that qualify.
IRS Funding
The Inflation Reduction Act also includes about $80 billion of additional funding over ten years for the IRS. The exact plans for those funds aren’t clear yet, but we know that $25 billion is intended to improve IRS operations. Additionally, law makers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This could include expanding staff and modernizing outdated processing systems.
