The Inflation Reduction Act and Taxes: What You Should Know
You’re probably not thinking much about taxes right now, in part because record inflation has you paying sky-high prices for essentials like food, clothing, and gas.
But the U.S. Senate just passed the Inflation Reduction Act of 2022, a sweeping piece of legislation initially proposed by Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Joe Manchin (D-W.Va.) that is 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, yes, hopefully inflation. Proponents of the bill say that its various provisions for fighting climate change, supporting clean energy production, and raising tax revenue, will reduce the deficit and in turn, combat inflation. And if the bill becomes law, some of the expanded tax credits in it could benefit you.
The massive bill was passed in a 51-50 party-line vote, following days of Democratic negotiations and more than 15 hours of “vote-a-rama,” a Senate process involving an unlimited number of amendment votes. Vice President Kamala Harris placed the tie-breaking final vote.
In the days leading up to the vote, some changes were made to the initial proposed bill so that Sen. Kyrsten Sinema (D-Ariz.) could agree to support the legislation. It has been reported that under the deal with Sen. Sinema, manufacturers would somehow be shielded from a proposed 15% minimum corporate tax, and provisions in the bill that would have narrowed the so called “carried interest loophole” have been removed. The revised bill also reportedly includes a 1% excise tax on corporate stock buybacks.
Now that the Senate has approved the Inflation Reduction Act, the bill must pass in the House of Representatives, where the vote margin is also quite slim. (Some Democratic lawmakers in the House may be disappointed that the massive bill doesn’t make any changes to the popular state and local tax (SALT) deduction, which is currently capped at $10,000 per year). The House is expected to take up the legislation Friday.
In the meantime, it’s good to have information about how the Inflation Reduction Act might impact your taxes.
Small Business And Middle-Class Income Taxes
The first piece of relatively good news for most of us 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 if or when the bill becomes law remains to be seen. But for now, lawmakers who back the legislation say that it will not raise taxes on small business or middle-income families.
Instead, the bill would have some corporations pay more tax than they currently pay. For example, under the bill, some large businesses would pay a minimum corporate tax rate of 15%. Right now, 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 bill would also extend 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 could continue to benefit from lower health care premiums.
Eligibility for the ACA premium tax credit program was temporarily expanded during the pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022.
Clean Energy Tax Credits For Homeowners
To support clean energy, the Inflation Reduction Act would, in some cases, provide new tax credits. Other energy-related tax credits would be extended—some of which could benefit homeowners.
For example, the bill proposes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. That tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.
Affordable housing could also get a boost under the bill because the Inflation Reduction Act would create a $1 billion incentive program for energy-efficient affordable housing.
Electric Vehicle Tax Credits
The Inflation Reduction Act also contains provisions for electric vehicle tax credits. Essentially, existing tax credits for buying a new or used electric vehicle would be extended for 10 years—until December 2032. Under the proposed bill, those credits would apply to any “clean vehicle,” which, for example, could include hydrogen fuel cell cars.
If the bill passes, there would be income limits on who could claim the electric vehicle credits and limits based on the manufacturers retail sales price (MSRP) of the cars that would qualify for the credit. Those limits would effectively exclude higher-priced luxury electric vehicles.
Also, there would be an option for car buyers to take the clean vehicle tax credit as a discount at the time of the car purchase. That means that you wouldn’t have to wait until tax time to benefit from the credit.
IRS Tax Enforcement
The Inflation Reduction Act proposes $80 billion of additional funding over ten years for the IRS.
It’s not clear at this point how that money would be spent, but lawmakers anticipate that the IRS would use the funds to improve tax enforcement. This might include boosting staffing levels and modernizing outdated processing systems.
As you can see, if the Inflation Reduction Act becomes law, it could potentially make some interesting changes to current tax credits that impact some homeowners and car buyers. It could also shift some longtime tax policy—particularly for some large corporations.
And while all the proposed tax changes in the proposed legislation may not impact your personal tax bill, a few extended tax credits might save you some money at tax time. Additionally, the bill contains provisions that could allow Medicare to negotiate lower prices for some prescription drugs.
So, stay tuned. The Inflation Reduction Act of 2022 could become law by the end of the week.