Tax Credits in the Inflation Reduction Act: What You Should Know

You may have heard that last year, President Biden signed the Inflation Reduction Act, a sweeping piece of legislation designed to address some of the significant issues that the U.S. is facing. Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and the need to raise tax revenue. But did you know that the various clean energy tax credits and other tax incentives in the Inflation Reduction Act might benefit you?

Inflation Reduction Act: Small Business and Middle-Class Income Taxes

The relatively good news for most 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 remains to be seen. 

For now, under the Inflation Reduction Act, some corporations will pay more tax than they currently pay. For example, under the new law, large businesses with more than $1 billion in reported income, will pay a minimum corporate tax rate of 15%. The Inflation Reduction Act also includes a 1% excise tax on corporate stock buybacks.

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This provision is designed to address the fact that some very large companies that you may be familiar with, like Nike or Amazon for example, pay very little in federal taxes. 

Affordable Care Act Premium Tax Credits

The Inflation Reduction Act also extends 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 can continue to benefit from lower health care premiums.

The Affordable Care Act’s premium tax credit was designed to help lower- and middle-income Americans pay for health insurance purchased through the healthcare marketplace (i.e., HealthCare.gov (opens in new tab)). Health insurance can also be purchased through some state exchanges.

Eligibility for the ACA premium tax credit program was temporarily expanded during the COVID-19 pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022. As a result, the ACA premium tax credit is extended for three more years, which means that more people will likely qualify for the premium tax credit, and some of those people will receive a larger credit.

For more information about how the Inflation Reduction Act can impact ACA premiums, see: Inflation Reduction Act Will Boost Obamacare Tax Credit.

Clean Energy Tax Credits for Homeowners

To support clean energy, the Inflation Reduction Act in some cases, provides new tax credits. Other energy-related tax credits are extended—some of which could benefit homeowners.

Solar Project Tax Credit: For example, the law includes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. The tax credit that applies to solar panels can be beneficial on its own, of course. But it also has potential positive implications for people interested in using solar panels to charge their electric vehicles. That’s because if you’re eligible for both home and residential solar tax breaks and the federal EV charger and equipment tax credit, you could reap the benefits of two significant clean energy tax incentives in the new law.

The solar project tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.

Besides solar incentives, affordable housing could also increase because the Inflation Reduction Act creates a $1 billion incentive program for energy-efficient affordable housing.

For more information about how the Inflation Reduction Act can impact homeowner tax credits, see You'll Save More on Green Home Improvements Under the Inflation Reduction Act.

EV Tax Credit 2023

The Inflation Reduction Act also contains provisions for electric vehicle tax credits. Essentially, the existing tax credit for buying a new or used electric vehicle is extended for 10 years—until December 2032. The federal EV tax credit applies to any “clean vehicle,” which, for example, now includes hydrogen fuel cell cars.

However, the Inflation Reduction Act sets income limits on who can claim the EV tax credit and limits the manufacturers retail sales price (MSRP) of the cars that qualify for the EV tax credit. Those limits effectively exclude higher-priced luxury electric vehicles. 

The Inflation Reduction Act also removes the 200,000-car cap for claiming the EV tax credit, which could potentially allow manufacturers like Tesla, General Motors, and Toyota to qualify for the electric vehicle tax credit.

Also, there will be an option, beginning in 2024, for car buyers to take the EV 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 you file your tax return to benefit from the Inflation Reduction Act's clean vehicle tax break.

The Inflation Reduction Act also revives the federal EV charger tax credit for electric vehicle charging stations and equipment that had expired in 2021..

For more information about how the new law will impact EV tax credits, see EV Tax Credits Are Changing: What’s Ahead, and The Federal Tax Credit for EV Chargers is Back.

IRS Enforcement

The Inflation Reduction Act includes $80 billion of additional funding over ten years for the IRS. The idea is that the funds could help improve tax compliance, which in turn, could bring in an estimated $203 billion in increased revenue.

It’s not yet clear exactly how that money will be spent (the IRS is due to release a report on that soon), but lawmakers anticipate that the IRS would use $45 billion of the funds to improve IRS tax enforcement. 

That might include increasing 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.

Additionally, now Republicans have control of the U.S. House of Representatives, it’s hard to say what will happen with IRS enforcement. That's because House Speaker Kevin McCarthy (R-Calif.), has vowed to block the $80 billion in funds allotted for the IRS in the Inflation Reduction Act. McCarthy and other Republican lawmakers have claimed that the funding will result in an “army” of 87,000 IRS agents coming to audit middle income Americans.

But President Biden's FY 2024 budget proposal contains an increase in funding for the IRS. Stay tuned.

Medicare Prescription Drugs

In addition to clean energy tax credits and higher taxes for some corporations, the Inflation Reduction Act contains provisions that allows Medicare to negotiate lower prices for some prescription drugs.

A key change is that out-of-pocket costs for covered Medicare prescription drugs will be capped at $2,000 per year, beginning in 2025. That cap will be adjusted yearly for inflation. And beginning in January 2023, people who take insulin and have Medicare prescription drug coverage, will have their out-of-pocket cost capped at $35 for a month’s supply. 

Additionally, under the Inflation Reduction Act, Part-D adult vaccines for people with Medicare, will be available at reduced cost beginning in 2023.

The Centers for Medicare and Medicaid services has more information on how the Inflation Reduction Act impacts the costs of Medicare prescription drugs.

Clean Energy Tax Incentives in the Inflation Reduction Act

As you can see, the Inflation Reduction Act changes some current tax credits that impact eligible homeowners and EV buyers. It also shifts some longtime tax policy—particularly for certain large corporations.

And while all the tax changes in the Inflation Reduction Act may not impact your personal tax bill, a few extended and enhanced tax credits might save you some money when it's time to file your federal tax return.

Right now, the U.S. Treasury Department and the IRS are seeking public comment on the clean energy incentives and credits in the Inflation Reduction Act. But the notices mean that Treasury and the IRS are planning to release proposed regulations addressing key tax provisions in the Inflation Reduction Act.