How the Inflation Reduction Act may impact your taxes
By Patrick T.R. Charvat, CPA
From green energy and electric vehicle tax credits to the potential for increased IRS auditing, provisions in President Biden’s Inflation Reduction Act promises to have a major impact on the federal tax collection system.
While the Act is wide-ranging in its scope and goals, this article focuses on how the Act could affect the average American.
Green energy construction provisions and tax breaks
The Act expanded two tax credit programs aimed at property owners.
The Nonbusiness Energy Property Credit is now the Energy Efficient Home Improvement Credit, and the Act extended it through 2032.
Taxpayers can claim the credit if they install energy-efficient water heaters, central air systems, furnaces, boilers, heat pumps – and under the Act – biomass stoves, and electrical panels. This credit can also be used toward the cost of conducting home energy audits. Credits are also available for installing energy-efficient doors, insulation, and windows.
Significantly, the Act established an annual credit limit of $1,200 – a substantial increase from the previous lifetime limit of $500. Increasing the credit amount and offering it annually makes it attractive for property owners to undertake energy-saving home improvements spread over multiple tax years.
The popular Residential Energy Efficient Property Credit also has a new name – the Residential Clean Energy Credit – and is available through 2034.
As before, it is available to taxpayers who install qualifying systems that use green energy sources such as solar, wind, geothermal, and fuel cell equipment to generate electricity or regulate home temperature.
Additionally, the credit now applies to battery storage systems, with the perceived goal of connecting energy-generating systems with battery technology that can store excess renewable energy.
Electric vehicle tax credits and potential pitfalls
Speaking of battery technology, and in keeping with the theme of renaming credits, the New Qualified Plug-In Electric Drive Motor Vehicle Credit is now the Clean Vehicle Credit. The Act also extended it through 2032 and reworked it a bit.
While buyers of qualifying electric and hybrid cars can potentially receive up to a $7,500 credit, there are various restrictions. To start, the MSRP of the vehicle in question must be below $55,000 for sedans and $80,000 for trucks, vans and SUVs.
The modified Adjusted Gross Income of the taxpayer for the year claimed must be $150,000 or below for single filers, $300,000 for married filing jointly couples, and $225,000 for head of household filers.
There is also a new credit created for Previously-Owned Clean Vehicles. As the name implies, this credit can be claimed when purchasing a used vehicle (at least two model years old) and is worth up to $4,000 or 30 percent of the vehicle’s price, whichever is lower.
The modified Adjusted Gross Income limits are lower, with caps of $75,000 for single filers, $150,000 for married filing jointly couples, and $112,500 for head of household filers.
However, the most significant new requirement relates to a where a vehicle is built and the source of its components.
The Act specifies that battery components manufactured by “foreign entities of concern” (including countries such as China) will be ineligible to receive the credit after 2023. Beginning in 2025, using any critical mineral in a battery extracted or processed by said “foreign entities of concern” will also cause the vehicle to be ineligible for the credit. Further, the final assembly of the vehicle must occur in North America.
Early analysis from sources such as the Alliance for Automotive Innovation predicts this could severely limit the range of vehicles qualifying for the tax credit.
For more information, visit https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit
The Department of Energy is working with the IRS to clarify which vehicles qualify under the new guidelines. The webpage makes it clear that the process is ongoing, and the IRS warns that some vehicles on the DOE list may not qualify after further review.
Increased IRS audits and enforcement
While not a change to the tax code, it is worth mentioning the IRS is receiving $80 billion for improvements to areas such as taxpayer services, enforcement, and operations support.
The stated goal of hiring more IRS auditors for increased tax code enforcement may increase the chances of individual audits. However, the Act’s supporters say the additional funding and hiring will increase the accessibility of IRS personnel to taxpayers who have questions about their filings and clear the backlog of unprocessed returns and correspondence built up throughout the COVID-19 pandemic.
Treasury Secretary Janet Yellen has set a six-month timetable for the IRS to provide specific details on how it will use the additional funds.
Moving forward
The Inflation Reduction Act will greatly impact the country's tax landscape – and possibly your taxes.
Boyer & Ritter’s accountants and tax experts are poised to meet the challenges ahead and help you stay in compliance.
Patrick T.R. Charvat is a CPA and tax supervisor who has experience working with individuals and multistate and local business entities. Contact Patrick at 717-761-7210 or pcharvat@cpabr.com.