Tax Credit Changes Under the Inflation Reduction Act

By: Stacey Nickens

On August 16, 2022, President Biden signed the Inflation Reduction Act into law, enacting legislation designed to combat climate change, support clean energy, and raise tax revenue.

The new legislation increases corporate tax rates, offers additional tax credits or expands existing ones, and increases funding for the IRS. Large businesses with more than $1 billion in reported income will face higher corporate tax rates. Additionally, the IRS will receive $80 billion in additional funding over the next 10 years. Lawmakers anticipate that a significant portion of these funds will be used to increase tax enforcement and improve the efficiency of IRS operations.

Taxpayers who buy health insurance through the federal Health Insurance Marketplace as well as taxpayers who invest in clean energy may be able to claim tax credits expanded or extended by this legislation. Tax credits directly offset a taxpayer’s liability. For example, if a taxpayer owes $4,000 in taxes, a $1,000 tax credit will decrease their liability to $3,000. Let’s review some of the tax credits expanded or extended through the Inflation Reduction Act.

Affordable Care Act Premium Tax Credits
Prior to the pandemic, certain taxpayers who purchased healthcare through the federal Health Insurance Marketplace could claim an Affordable Care Act (ACA) premium tax credit. However, this credit was only available to households whose income fell between 100% to 400% of the federal poverty level.

During the pandemic, The American Rescue Plan Act (ARPA) extended eligibility for the premium tax credit to households whose income was above 400% of the federal poverty level. Now, the Inflation Reduction Act will extend this increased eligibility through the 2025 tax year.

Not only will more households be able to claim the credit, eligible households will be able to claim a larger credit. Generally, the credit equals the health insurance premium associated with the second cheapest “silver plan” available to the taxpayer, less the taxpayer’s own contribution amount. ARPA reduced the amount of household income that taxpayers had to contribute towards their premium in 2021 and 2022, thus increasing their premium credit. The Inflation Reduction Act will allow these lower contribution percentages to continue through the 2025 tax year.

Energy Efficient Home Improvement Credit
Through 2032, homeowners will be able to claim a tax credit for certain home improvements. The credit will be worth 30% of all eligible home improvements, including the installation of energy-efficient windows, doors, water heaters, and other energy-efficient appliances and systems. The maximum credit allowed per year will be $1,200, with certain maximums for individual projects. Homeowners who install an electric or natural gas heat pump water heater, electric or natural gas heat pump, or biomass stove or boiler can claim up to a $2,000 credit for the project.

Residential Clean Energy Credit
Expanding the Residential Energy Efficient Property Credit, this credit will be worth 30% of the cost to install solar, wind, or other qualifying systems through 2032. The credit will then fall to 26% of the cost of installation for 2033 and to 24% for 2034, before expiring after 2034.

Alternative Fuel Refueling Property Credit
Electric vehicle owners may need to install refueling equipment in their home. Eligible equipment costs can be partially reclaimed through this credit, which will be worth 30% of the installation costs, up to $1,000. Other equipment for storing or dispensing alternative fuel for motor vehicles will also be covered under this credit.

Electric Vehicle Tax Credits
For electric vehicles put into service in 2023, purchasers can claim up to a $7,500 tax credit. The amount of the credit depends on characteristics of the vehicle. Purchasers of used electric vehicles can also qualify for a credit of up to $4,000 or 30% of the vehicle’s cost, whichever is less. This credit applies to all “clean” vehicles, including hydrogen fuel cell vehicles and certain plug-in hybrid vehicles.

Beginning in 2024, those who qualify for the credit will be able to take the credit as a discount to the vehicle’s price at the time of purchase.

To qualify for this credit, single filers must have modified adjusted gross income of $150,000 or less. Joint filers face an income limit of $300,000, and head of household filers face an income limit of $225,000. The credit is also limited based on the original sales price of the vehicle, excluding high-priced luxury vehicles from the credit.

Questions?

If you have any questions about the changes enacted by the Inflation Reduction Act, please do not hesitate to reach out to our experienced tax team. We are happy to help you navigate these changes.