November 20, 2022
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA) which includes significant changes related to healthcare and energy/climate change related credits. It also provides $78.9B in additional funding to the IRS. Here are the highlights which may be most impactful for taxpayers:
Healthcare
- The America Rescue Plan’s expansion of the Premium Tax Credit, due to expire in 2022, has been extended through 2025. This is a refundable credit allowing certain taxpayers relief on health insurance premiums purchased from the Health Insurance Marketplace. In addition, qualification has been changed from below 400% of the Federal Poverty Level, to a limit of 8.5% of household income.
- With respect to Medicare, insulin cost will be capped at $35 per month in 2023 and the out-of-pocket annual limit of $2,000 on drugs will be implemented in 2025.
Energy/climate change
- The Energy Efficient Home Improvement Credit has been extended through 2022 allowing 10% of qualified improvements on the primary residence. For years 2023-2032, there will be a credit rate of 30% of qualified improvements on any residence (primary or secondary) used by the taxpayer with a $1,200 annual limit.
- The Solar Credit has been available since 2005. The IRA has renamed this the Residential Clean Energy Credit and extended it through 2034:
- A credit of 30% is allowable through 2032, 26% in 2033 and 22% in 2034.
- The credit is only available on an owned residence and on an original installation.
- The Clean Vehicle Credit has been extended through 2032. The credit will only apply to vehicles assembled in the US and a VIN number is required.
- The price limits in 2023 are $55,000 for cars and $80,000 for trucks.
- Income limits of $150,000 for single taxpayers and $300,000 for Married Filing Jointly.
- Plug-in-hybrids to qualify provided the vehicle has a battery with 7kWh capacity or greater.
- For 2023 through 2032, previously owned electric and fuel cell vehicles can qualify for credit a 30% of purchase price capped at $4,000 A qualified vehicle must:
- Be at least 2 model years old.
- Sold by a dealer for $25,000 or less.
- Purchase for use not resale.
- The taxpayer claiming the credit must be the second owner.
- The same credit must not have been taken for the last three years.
- Adjust Gross income the in current year or prior year must be less than $150,000 joint or S75,000 for single filers.
- The Alternative Fuel Refueling Property Credit has been extended through 2032. This was enacted to encourage the installation of facilities to store or dispense alternative fuels in 1992. This incentive has evolved into a tax credit that also applies to equipment that recharges electric cars.
- For 2022, a credit of up to 30% of alternative fuel refueling, capped at $30,000 per location
- For 2023, the IRA will eliminate the per-location limit in favor of per-item.
- The per-item limit is now $100,000 (was $30,000) per depreciable item.
- After 2023, the credit is 6% unless prevailing wage paid, then 30%.
- Property must be in low-income or nonurban area.
- Residential charging station remains at 30% and $1,000 cap.
- The IRA has created a new credit for commercial clean vehicles, as defined under Title II of the Clean Air Act, acquired after 2022 and before 2033. The available credit is:
- Up to 15% of basis (30% if not powered by gas or diesel).
- Capped at $7,500 if vehicle weighs less than 14,000 lbs. $40,000 for heavier vehicles.
- Must be propelled to a significant extent by electricity or fuel cell.
- The Energy Efficient Commercial Buildings Deduction allows building owners to claim up to a $1.80 per square feet for energy-efficient buildings or installing systems to that effect. To qualify, newly constructed or renovated buildings must meet or exceed some key energy reduction requirements and ASHRAE standards. Beginning after 2022 through 2032, the IRA makes three modifications
- The building must increase efficiency to a comparable building by 25%, formerly 50%
- Deduction is increased up to $5 per square foot provided prevailing wage is paid and building operating at the maximum energy efficiency.
- For a retrofit of more than 5-year-old building located in the US, a deduction up to the basis of the retrofit is allowable (not to exceed per square foot value based on energy usage intensity)
- The IRA extends the New Energy Efficient Home Credit through 2032. For 2022, the credit follows prior law and allows eligible contractors who build and sell qualifying energy-efficient new homes a $2,000 credit, with manufactured home qualifying for a $1,000 credit
- For 2023, the IRA increases the credit to $2,500 for energy efficient single family and manufactured new homes meeting certain Energy Star requirements.
- An increase to $5,000 is possible if home is certified as “zero energy ready” under DOE Zero Energy Ready Home Program.
- For multi-family homes, the credit is $500, which goes up to $2,500 for multi-family units that meet Energy Star requirements, and the contractor pays the Prevailing Wage.
- The Research Payroll Credit has been enhanced for tax years beginning after December 31, 2022:
- The eligible research credit which can be applied against payroll taxes has been increased from $250,000 to $500,000.
- An eligible small business has gross receipts less than $5M and is not more than 5 years old
These changes have just been rolled out and additional guidance on some of the definitions is expected from the IRS shortly. You should consult your tax professional to assess how these credits apply to your situation.