{"id":292,"date":"2022-10-01T01:36:21","date_gmt":"2022-10-01T01:36:21","guid":{"rendered":"https:\/\/www.tax.idl3.co\/uncategorized\/3-ways-the-inflation-reduction-act-could-impact-your-taxes\/"},"modified":"2022-10-01T01:36:21","modified_gmt":"2022-10-01T01:36:21","slug":"3-ways-the-inflation-reduction-act-could-impact-your-taxes","status":"publish","type":"post","link":"https:\/\/cartagenabusiness.com\/?p=292","title":{"rendered":"3 Ways the Inflation Reduction Act Could Impact Your Taxes"},"content":{"rendered":"

By now, you\u2019ve probably heard about the Inflation Reduction Act President Biden signed into law in mid-August. On the surface, it sounds like a good thing. Who wouldn\u2019t want to reduce the sky-high inflation<\/a> we\u2019ve all been dealing with this year? But, as always, there\u2019s a little more to it.<\/p>\n

Let\u2019s go over the goals of the Inflation Reduction Act and how some of its tax changes could impact taxpayers like yourself in 2022 and beyond.<\/p>\n

What does the Inflation Reduction Act include?<\/h2>\n

The Inflation Reduction Act (IRA) covers a lot of ground \u2014 ambitious investments in clean energy to help combat climate change, prescription drug pricing reform, and even tax increases on large corporations.<\/p>\n

We\u2019re going to narrow our focus to three main ways the IRA is likely to impact individual taxpayers or small businesses:<\/p>\n

Changes to clean energy tax incentives
\nLarge IRS funding increases
\nExtension of the Affordable Care Act (ACA) subsidy program<\/p>\n

1. Clean energy tax credits<\/h2>\n

The Inflation Reduction Act offers homeowners many tax incentives and rebates for going green. If you\u2019ve been thinking about making clean energy updates to your home, these rebates could help you save a lot of money.<\/p>\n

Energy Efficient Home Improvement Credit<\/h3>\n

This new tax credit is a revamp of an old tax credit that expired at the end of 2021.<\/p>\n

Previously, the credit allowed you to claim 10 percent<\/a> of the cost of installing specific energy-efficient improvements in your home, including windows, doors, skylights, insulation, roofing, and more. The old credit also allowed you to claim 100 percent of the costs of installing residential energy property like heat pumps, water heaters, central AC systems, etc.<\/p>\n

But there was a catch \u2014 a lifetime credit limit of $500 and other individual credit limits for certain types of equipment. For example, a $200 credit limit was allotted for installing new windows.<\/p>\n

If you intend to claim this tax credit for tax year 2022, the old tax credit rules still apply.<\/p>\n

However, beginning Jan. 1, 2023, you will be able to use this tax credit to claim 30 percent of the cost of eligible energy-efficient home improvements, with a $1,200 annual limit (with one exception we note in the list below).<\/p>\n

Other individual credit limits beginning in 2023 include:<\/p>\n

$250 limit for one exterior door and a $500 limit if you decide to upgrade all your exterior doors
\n$600 limit for exterior windows and skylights; central air conditioners; electric panels (as well as certain related equipment); and natural gas, propane, or oil furnaces or hot water boilers
\n$150 limit for home energy audits
\n$2,000 limit for electric or natural gas heat pumps, water heaters, or biomass stoves and boilers<\/p>\n

Starting in 2025, you will need to include a product identification number from the equipment manufacturer on your tax return to claim the tax credit.<\/p>\n

For more information on what types of equipment are covered, check out ENERGY STAR\u2019s website<\/a>.<\/p>\n

Residential Clean Energy Credit<\/h3>\n

Another credit expanded and enhanced by the IRA is the Residential Clean Energy Credit, a tax break for purchasing eligible solar property.<\/p>\n

Here\u2019s what\u2019s changing:<\/p>\n

The IRA restored the credit rate to 30 percent of the cost of installing qualifying clean-energy systems (solar, wind, geothermal heat pumps, fuel cells, etc.) to produce electricity or regulate your home\u2019s temperature. The credit rate had previously dropped to 26 percent in 2020 and was set to expire in 2024.
\nYou can now claim the Residential Clean Energy Credit through Dec. 31, 2034. The 30 percent credit rate is available through 2032, then reduces to 26 percent in 2033 and 22 percent in 2034.
\nBiomass furnaces and water heaters will only be eligible for the credit through the end of 2022. Beginning in 2023, qualified battery storage technology with a capacity of at least 3 kilowatt hours (kWh) becomes eligible. Solar, fuel cells, or wind energy equipment used to generate electricity will remain eligible through 2034, as well as geothermal heat pump equipment used to regulate your home\u2019s temperature.<\/p>\n

Electric vehicle tax credits<\/h3>\n

If you\u2019ve been considering buying an electric vehicle (EV), you\u2019re in luck! The IRA extended the existing federal EV tax credit for 10 years to help reduce emissions. It\u2019s now available through 2032 and comes with numerous changes.<\/p>\n

We\u2019ve listed the short version below, but you can learn about the EV tax credit changes in more detail in this article.<\/p>\n

The credit now applies to any \u201cclean vehicle,\u201d including hydrogen fuel cell cars.
\nUsed EVs placed in service after 2022 can now qualify for the credit, while only new EV purchases were previously eligible.
\nFor vehicles placed in service after Dec. 31, 2023, you can take the credit as a discount at the time of purchase rather than waiting until filing your federal income tax return (potentially more beneficial, allowing you to claim the entire credit amount as a discount without it being limited to your tax liability).
\nNew limitations require the vehicle\u2019s final assembly to be completed in North America to qualify.
\nThe IRA also imposes new income limits for buyers to qualify for the federal EV credit (these income limits differ depending on if you are buying a new or used clean energy vehicle).
\nThere are new retail sale price limits vehicles must meet to qualify.
\nThe IRA removed the 200,000-car sale cap, meaning some vehicles that were previously ineligible due to this cap could become eligible again.<\/p>\n

2. Increases in IRS funding and tax enforcement<\/h2>\n

If you\u2019ve been keeping up with news about the Inflation Reduction Act, you may have also heard about the $80 billion going to the IRS over the next 10 years.<\/p>\n

How will the IRS use this funding?<\/h3>\n

The IRS has been severely underfunded and understaffed for a while, and the pandemic only worsened matters. As of June 2022, the tax agency still had a backlog of 11 million<\/a> individual tax returns waiting to be processed \u2014 twice as many as an average year.<\/p>\n

The new funding provided by the Inflation Reduction Act will allow the IRS to hire more employees, modernize its outdated IT systems, and resume proper auditing rates, which have been down by over 50 percent<\/a>.<\/p>\n

What\u2019s my audit risk?<\/h3>\n

Did alarm bells start ringing in your head with the thought of increased audits? Don\u2019t worry \u2014 this will not likely affect poor or middle-class Americans.<\/p>\n

Treasury Secretary Janet Yellen<\/a> stated that the IRS should not increase audit rates on individuals or small businesses earning less than $400,000 per year. Instead, the agency will focus on \u201chigh-end noncompliance,\u201d like large corporations and individuals with complex taxes and high net worth. Hardworking low- and middle-income households should not be a target.<\/p>\n

In fact, households and businesses under the $400,000 threshold should be less likely to be audited, thanks to expected information technology improvements and more robust customer service, making the kinds of confusion that can lead to audits less likely.<\/p>\n

3. Extension of the ACA health care subsidy program<\/h2>\n

Lastly, the IRA has extended the enhanced Affordable Care Act (ACA) subsidy program through 2025.<\/p>\n

This program offers federal subsidies to low- and middle-income households in the form of premium tax credits (PCTs). The PCT is a refundable tax credit designed to help you afford health insurance coverage for your family. Since it is refundable, you can still claim the full credit even if it\u2019s greater than your tax liability.<\/p>\n

The American Rescue Plan (passed in March 2021) expanded the ACA program availability by temporarily allowing more people to qualify for the premium tax credit. If you qualify, you could also get a larger credit as well. These eligibility changes were set to expire at the end of 2022 but have now been extended for three more years:<\/p>\n

You can claim the PCT if your household income exceeds 400 percent of the poverty line and you meet all other qualifications.
\nYou are eligible to claim the credit if your cost of health insurance premiums exceeds 0-8.5 percent of your household taxable income (the percentage rate is determined by your household income \u2014 the lower your income, the lower your percentage rate, and the larger your credit).<\/p>\n

The enhanced ACA extension means nothing has changed from tax year 2021, and the same provisions will remain in effect until Dec. 31, 2025.<\/p>\n

\u00a0<\/p>\n

This article is for informational purposes only and not legal or financial advice.<\/h6>\n

The post 3 Ways the Inflation Reduction Act Could Impact Your Taxes<\/a> appeared first on TaxAct Blog<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"

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