In August, President Biden signed into law the 2022 Inflation Reduction Act (the Act). The Act includes several individual tax provisions – most notably an array of new tax credits relating to energy efficient homes, businesses, and vehicles. It also provides a three-year extension of the expanded Affordable Care Act health insurance subsidy.
The following is a summary of some of the Act’s key individual tax provisions.
Changes to the Electric Vehicle Tax Credit (Renamed Clean Vehicle Credit)
Currently, buyers of qualifying plug-in electric vehicles (EVs) are eligible for a nonrefundable tax credit of up to $7,500. The tax credit phases out once a vehicle manufacturer has sold 200,000 qualifying vehicles.
Changes to the Clean Vehicle Credit (previously Electric Vehicle Credit) after the Act include the following:
- Still allows purchasers of new electric vehicles a federal tax credit up to $7,500
- New limitations are put in place requiring some of the vehicle assembly to take place in North America to qualify for the credit.
- For vehicles placed in service after 2023, qualifying vehicles do not include any vehicle with battery components that were manufactured or assembled by certain foreign entities.
- For vehicles placed in service after 2024, qualifying vehicles do not include any vehicle in which applicable critical minerals in the vehicle’s battery are from certain foreign entities.
- Certain higher-income taxpayers are not eligible for the credit. Specifically, no credit is allowed if the current year or preceding year’s modified adjusted gross income (AGI) exceeds $300,000 for married taxpayers ($225,000 in the case of head of household filers; $150,000 in the case of other filers).
- Credits are only allowed for vehicles that have a manufacturer’s suggested retail price of no more than $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles.
- Taxpayers are only allowed to claim the credit for one vehicle per year.
- The 200,000 vehicle limit is eliminated.
Tax Planning Tip: If you are considering purchasing an electric vehicle and close to the adjusted gross income limits that will go into effect in 2023, you may want to consider accelerating your electric vehicle purchase(if possible) to take place before December 31, 2022 to avoid the income phaseouts.
Credit for Previously-Owned Clean Vehicles
The Act creates a new tax credit for buyers of previously owned qualified clean (plug-in electric and fuel cell) vehicles.
- The maximum credit is $4,000 and is limited to 30 percent of the vehicle purchase price.
- No credit is allowed for taxpayers above certain modified AGI thresholds. Married taxpayers filing a joint return cannot claim the credit if their modified AGI is above $150,000 ($112,500 in the case of head of household filers; $75,000 in the case of other filers). The taxpayer’s modified AGI is the lesser of modified AGI in the tax year or prior year.
- Credits are only allowed for vehicles with a sale price of $25,000 or less with a model year that is at least two years earlier than the calendar year in which the vehicle is sold.
- This credit can only be claimed for vehicles sold by a dealer and on the first transfer of a qualifying vehicle. Taxpayers can only claim this credit once every three years and must include the VIN on their tax return to claim a tax credit.
Changes to the Nonbusiness Energy Property Tax Credit (Renamed as the Energy Efficient Home Improvement Credit)
For years before 2022, a 10 percent tax credit, subject to a $500 per taxpayer lifetime limit, was available for qualified energy-efficiency improvements and expenditures for residential energy property on an individual’s primary residence.
The Act extends the credit through 2032. For property placed in services after 12/31/22, the credit rules are expanded to cover more types of improvements/property and to allow for higher credit amounts. Generally, the credit rate is increased to 30 percent, and there will be an annual (rather than lifetime) credit limit. The annual credit limit that will apply depends on the type of improvement you are making.
What are “qualified energy-efficiency improvements” and “expenditures for residential energy property?”
Qualified energy efficiency improvements include the following: Building envelope improvements including insulation, energy-efficient windows, and energy-efficient exterior doors.
Residential energy property includes the following: heat pumps, central air conditioners, water heaters, furnaces, and boilers, biomass stoves and boilers, certain energy-efficient oil furnaces and hot water boilers, cost to upgrade a panel if upgrade was to enable the installation and use of qualified energy efficiency improvements or residential energy property.
Annual limits
The total annual credit limit for qualified energy-efficiency improvements and residential energy property is generally $1,200 per year but a few specific types of improvements have lower or higher annual limits.
Exterior doors: Limited to $250 per door and $500 for all doors, per taxpayer per year.
Windows: Limited to $600 per taxpayer per year.
Residential energy property: Limited to $600 per taxpayer per year (but see following exception).
Electric or natural gas heat pump water heaters, electric or natural gas heat pumps and biomass stoves and boilers: Maximum annual credit increased to $2,000
Examples
The mix of different maximum credit amounts can be confusing. Here are a few examples to illustrate how some of the credit amounts work.
Example #1: You spend $3,000 on qualifying new windows in 2023. The potential credit is calculated at 30% of $3,000 or $900. The credit allowed is the lesser of 30% of your cost or the max windows credit amount of $600. Your credit is $600.
Example #2: Same fact pattern as Example #1, except you also purchase a new exterior door costing $800. Your credit allowed for the door is $240 (the lesser of 30% of your door cost ($800 x 30% = $240) or $250. Your credit allowed for the windows is $600 (as calculated in Example #1). Your total credit is $840.
Example #3: Same fact pattern as Example #2, except you also spend $2,000 on insulation in 2023. Your potential credit for the insulation is $600 ($2,000 x 30%). Your potential credit for the windows is $600 (as calculated above) and your potential credit for the door is $240 (as calculated above). Your total potential credit is $1,440. The annual maximum credit is $1,200 so your total credit allowed is $1,200.
Tax Planning Tip: The expanded credit amounts don’t go into effect until after 12/31/22. If you are planning on making any of these home improvements, you may want to wait until 2023 to take advantage of the larger credit amounts.
Tax Planning Tip: Beginning in 2023, consider splitting projects involving these types of improvements over more than one tax year if it looks like the cost will push you over the annual credit limit. Because of the new annual, rather than lifetime, credit limits, implementing these improvements over more than one year may allow you to claim higher tax credit amounts.
Restoration of 30 Percent Residential Energy Efficient Tax Credit (Renamed the Residential Clean Energy Credit)
A tax credit is currently provided for the purchase of solar electric property, solar water heating property, fuel cells, geothermal heat pump property, small wind energy property, and qualified biomass fuel property. Initially, the credit rate was 30 percent through 2019. It was then reduced to 26 percent through 2022, and was scheduled to be reduced to 22 percent in 2023 before expiring at the end of that year.
The Act extends the credit through December 31, 2034, restoring the 30 percent credit rate, beginning in 2022 through 2032, and then reducing the credit rate to 26 percent in 2033 and 22 percent in 2034. Qualified battery storage technology is also added to the list of eligible property.
Tax Planning Tip: The average home solar panel installation costs between $15,000 – $25,000. At a federal credit rate of 30%, this equates to federal tax credits ranging from $5,000 – $7,500. If you plan on claiming the solar credit and typically receive a refund with your federal tax filing, you may want to consider reducing the amount of federal income tax withheld from wages and other sources of income. This would allow you to hold onto your cash to use for other purposes sooner rather than receiving a large refund at tax filing time. You would need to change your tax withholding back to normal in the following year.
Alternative Fuel Refueling Property Credit (for Electric Vehicle Charging Stations)
Through 2021, taxpayers were allowed a tax credit for the cost of any qualified alternative fuel vehicle refueling property installed at a taxpayer’s principal residence. The credit was equal to 30 percent of these costs, limited to $30,000 for businesses at each separate location with qualifying property, and $1,000 for residences. The Act extends this credit through December 31, 2032, and makes certain additional modifications.
Extension of Health Insurance Subsidy
A health insurance subsidy is available through a premium assistance credit for eligible individuals and families who purchase health insurance through Exchanges offered under the Patient Protection and Affordable Care Act (PPACA). The premium assistance credit is refundable and payable in advance directly to the insurer on the Exchange. Individuals with incomes exceeding 400 percent of the poverty level ($54,360 for a one-person household in 2022) are normally not eligible for these subsidies. However, legislation passed in 2021 eliminated this limitation for 2021 and 2022 so that anyone can qualify for the subsidy. That legislation also limited the percentage of a person’s income paid for health insurance under a PPACA plan to 8.5 percent of income. The Act extends these provisions through 2025.
Tax Planning Tip: If you purchase health insurance through the Marketplace, you should pay careful attention to the amount of advance premium assistance credit (if any) reducing your monthly insurance cost. For 2020 and 2021, Congress had eliminated for some taxpayers the requirement to pay back excess advance premium assistance credits with your annual tax filing. Although the Inflation Reduction Act extended potential subsidies for people making income over 400% of the poverty level, it did NOT extend the provision to eliminate repayment of excess subsidies/credits.
If you would like to discuss how the Inflation Reduction Act specifically impacts your taxes, please reach out to me for a call.
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