Inflation Reduction Act’s Tax Impact on Individuals

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Earlier this month, President Biden signed the Inflation Reduction Act (Act) into law. This partisan legislation is focused on building and incentivizing investment into energy-efficient manufacturing and technologies. Concurrently, it expands the tax incentives available for clean energy vehicles and other purchases expected to result in a reduction of U.S. emissions of 25% – 40% by 2030. Despite the name, some have argued that its impact on inflation is debatable. Several provisions were included in the Act ranging from new tax incentives to healthcare insurance changes designed to benefit individuals. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Healthcare Benefits

It’s been more than ten years since the Affordable Care Act introduced the health insurance marketplace. While most of the Inflation Reduction Act’s healthcare provisions center on Medicare, one significant piece does focus on healthcare subsidies for other taxpayers.

In 2021, the American Rescue Plan Act extended subsidies for the health insurance marketplace to keep premiums affordable. On average, families saved $67 per month, according to the Department of Health and Human Services. Without a subsidy extension, out-of-pocket healthcare costs and premiums were set to increase, and millions were projected to lose insurance as a result. The Act extends healthcare subsidies through 2025. Additionally, tax credits are available to households’ making 400 percent of the federal poverty line.

One of the biggest changes to Medicare is that the federal government will begin negotiating the prices of the top ten most expensive prescription drugs starting in 2026. In 2029, that list will be expanded to the top 20 most expensive prescription drugs. Uncooperative pharmaceutical companies will be levied a 95 percent tax on drug sales. Only medicines on the market for at least nine years will be eligible for negotiations, or 13 years for certain biologic drugs.

More immediately, Medicare Part D beneficiaries will benefit from a maximum annual cost of $2,000 for out-of-pocket prescriptions. The $2,000 cap will be phased in over the next few years and fully in place in 2025. Insulin costs will be capped at $35 per month for any Medicare beneficiary, a significant win but one not extended to people with private insurance.

Energy Tax Incentives

Energy tax incentives are a big part of the Act. The White House said in an August 15 briefing that “Families that take advantage of clean energy and electric vehicle tax credits will save more than $1,000 per year” and “$14,000 in direct consumer rebates for families to buy heat pumps or other energy efficient home appliances” will save families another $350 per year.

Electric Vehicles

A $7,500 tax credit now applies to purchases of new electric vehicles placed in service before 2033. The manufacturer’s limit, a cap on the number of electric vehicles they could sell, is removed for those sold after 2022. The sticking point could be that not all vehicles will qualify. Only new electric vehicles less than $55,000 ($80,000 for trucks and SUVs) qualify, and certain components, like the battery, must be sourced under strict new requirements. such as final assembly in North America. Due to these qualification restrictions, the near-term applicability may be limited, and discretion will be needed when purchasing a vehicle that you believe may qualify.

Individual taxpayers will also get up to a $4,000 tax credit if they buy a used electric vehicle. Current guidance indicates the credit will be available at the point of sale starting in 2024.

The credit is only available to taxpayers earning less than $150,000 per year or $300,000 for couples who file jointly. There are many complicated pieces to this tax credit, so please be aware and do your research prior to relying upon a tax credit to help finance such a large purchase.

Although the IRS’s guidance warns that “there may be vehicles on the Department of Energy list that do not meet the final assembly requirement in all circumstances,” the IRS recommends a two-step process to verify whether a motor vehicle meets the final assembly requirement. First, check the Department of Energy’s model year 2022 and 2023 electric vehicles that might qualify. The second step is to enter the VIN into the National Highway Traffic Safety Administration’s VIN Decoder tool, which should identify where the vehicle was built.

Residential Energy Credits and Rebates

Homeowners can also benefit from an extended residential energy property tax credit. The 30 percent credit applies to purchases of rooftop solar panels, heat pumps, and small wind energy systems. Heat pumps have a higher deduction of $2,000.

Low-income homeowners can receive home energy rebates of varying levels:

  • $8,000 for heat pumps that can heat and cool the home
  • $1,750 for heat pump water heaters
  • $840 for electric stove
  • And other similar rebates.

Individual taxpayers can claim a 30 percent tax credit for residential rooftop solar panels until 2032 when the credit begins to phase out. It’s estimated that this credit could save homeowners up to $7,000 on a standard rooftop solar panel system. Tax incentives are extended to home-use batteries as well.

Child Tax Credit and SALT Cap

Extending the Child Tax Credit didn’t end up making the final cut. Further, the contentious $10,000 SALT cap remained in effect, though most states now have workarounds for pass-through entities.

IRS Enforcement

More than simply raising taxes or creating new ones, utilizing the IRS to increase enforcement is another viable way to increase federal revenue. It’s well-known that the IRS has been underfunded and understaffed for years, a problem exacerbated during COVID leading to the agency’s singular worst year ever in 2021. Our firm and many of our clients feel the pain of an understaffed IRS when we are trying to work with agents to resolve problems or seek guidance.

To that end, the IRS will see significantly more funding through the Inflation Reduction Act, to the tune of $80 billion over the next ten years. The funding is broken down into four areas:

  • Enforcement
  • Operations Support
  • Business System Modernization
  • Taxpayer Services

Enforcement activities will receive more than half of all designated funding, though upgrading the agency’s technology will see a 153 percent increase from current funding levels. While the IRS will be increasing its efforts to collect taxes, conduct criminal investigations, and overall improve tax compliance, the Administration has publicly indicated that families who earn less than $400,000 per year will not be targeted, although we are unsure as to what steps will be implemented to achieve this goal. Legislators have asked the agency to avoid prioritizing enforcement against low- and middle-income taxpayers.

We’re Here to Help

There are many opportunities for individuals and families to realize savings from changes made in the Inflation Reduction Act. Although some savings will come in time, various energy tax incentives may be available immediately. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.