Author: Kelley R. Taylor
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You’re probably not thinking much about taxes right now, in part because inflation has you paying sky-high prices for essentials like food, clothing, and gas. But you may have heard that Congress is poised to pass the Inflation Reduction Act of 2022, a sweeping piece of legislation that is designed to address some of the significant issues that the U.S. is facing.
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Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and, yes, hopefully inflation. Proponents of the legislation say that its various provisions for fighting climate change, supporting clean energy production, and raising tax revenue, will reduce the deficit and in turn, combat inflation. And some of the expanded tax credits in the legislation could benefit you.
The multi-billion-dollar bill was first passed by the Senate along party lines, with Vice President Kamala Harris placing the tie-breaking 51-50 final vote.
Now, the House of Representatives is taking up the legislation. And although some House Democratic lawmakers may be disappointed that the $739 billion bill doesn’t make any changes to the popular state and local tax (SALT) deduction, the legislation is expected to pass the House.
So, it’s good to have information about how the Inflation Reduction Act might impact your taxes.
Small Business and Middle-Class Income Taxes
The first piece of relatively good news for most of us is that the Inflation Reduction Act is not designed to increase taxes on small businesses or on families that make $400,000 or less. However, whether that would be the actual tax effect if or when the bill becomes law remains to be seen. But for now, lawmakers who back the legislation say that it will not raise taxes on small business or middle-income families.
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Instead, the legislation would have some corporations pay more tax than they currently pay. For example, under the bill, some large businesses with more than $1 billion in reported income, would pay a minimum corporate tax rate of 15%. Right now, some very large companies that you may be familiar with, like Nike or Amazon for example, pay very little in federal taxes. The Inflation Reduction Act also includes a 1% excise tax on corporate stock buybacks.
Affordable Care Act Premium Tax Credits
The bill would also extend the expanded Affordable Care Act (ACA) program through 2025, so that eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace could continue to benefit from lower health care premiums
Eligibility for the ACA premium tax credit program was temporarily expanded during the pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022.
Clean Energy Tax Credits for Homeowners
To support clean energy, the Inflation Reduction Act would, in some cases, provide new tax credits. Other energy-related tax credits would be extended—some of which could benefit homeowners.
For example, the bill proposes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. That tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.
Affordable housing could also get a boost under the bill because the Inflation Reduction Act would create a $1 billion incentive program for energy-efficient affordable housing.
Electric Vehicle Tax Credits
The Inflation Reduction Act also contains provisions for electric vehicle tax credits. Essentially, existing tax credits for buying a new or used electric vehicle would be extended for 10 years—until December 2032. Under the bill, those credits would apply to any “clean vehicle,” which, for example, could include hydrogen fuel cell cars.
There would be income limits on who could claim the electric vehicle credits and limits based on the manufacturers retail sales price (MSRP) of the cars that would qualify for the credit. Those limits would effectively exclude higher-priced luxury electric vehicles. The bill would also remove the 200,000-car cap for claiming the credit, which could allow manufacturers like Tesla, General Motors, and Toyota to qualify for the credit.
Also, there would be an option, beginning in 2024, for car buyers to take the clean vehicle tax credit as a discount at the time of the car purchase. You would effectively be transferring the credit to the dealer who could reduce the price of the vehicle by the amount of the EV tax credit. That means that you wouldn’t have to wait until tax time to benefit from the clean vehicle tax break.
IRS Tax Enforcement
The Inflation Reduction Act proposes $80 billion of additional funding over ten years for the IRS.
It’s not clear at this point exactly how that money would be spent, but lawmakers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This might include boosting staffing levels and modernizing outdated processing systems ($5 billion is allotted in the bill for technology). Another $25 billion of the additional funding is intended to improve IRS operations.
Stay Tuned
As you can see, since the Inflation Reduction Act is expected to become law, it could make some interesting changes to current tax credits that impact some homeowners and car buyers. It could also shift some longtime tax policy—particularly for some large corporations.
And while all the proposed tax changes in the proposed legislation may not impact your personal tax bill, a few extended tax credits might save you some money at tax time. Additionally, the bill contains provisions that could allow Medicare to negotiate lower prices for some prescription drugs.
So, stay tuned. The Inflation Reduction Act of 2022 could be on the President’s desk in the coming days.
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