President Biden passed the Inflation Reduction Act of 2022 in August. It was not a major tax reform but did include updates to the tax code. Those updates include:
- Energy Efficient Tax Benefits
- Healthcare Tax Benefits
- Corporate Tax Changes
Keep reading to learn how these changes may affect your clients’ taxes now and in the future.
Note: Most of the tax provisions in the Inflation Reduction Act will not go into effect until tax year 2023. The 2022 TaxSlayer Pro software programs will not have any last-minute changes.
How will the Inflation Reduction Act affect my clients?
The Inflation Reduction Act will change some of the credits your clients may claim and how you prepare their returns. This is especially true for clients who have corporations or who purchase electric vehicles.
Will the Inflation Reduction Act raise my clients’ taxes?
The Inflation Reduction Act should not raise taxes for your clients. However, the law does impose a new 15% tax on corporations earning more than $1 billion, so if that applies to your client, they could see an increase.
What are the energy tax changes for my clients?
The tax bill includes provisions for home energy rebate programs, including the Clean Vehicle Credit, Alternative Fuel Vehicle Credit, and energy credits for home improvements.
Extended and expanded – Clean Vehicle Credit
The existing credit of up to $7,500 for purchasing a new electric vehicle was renamed the Clean Vehicle Credit.
The act expanded the Clean Vehicle Credit, so beginning January 1, 2023, your clients who buy a used electric car could be eligible for up to $4,000 in tax credit, or 30% of the sale price.
There are also modified adjusted gross income limits for this credit. For new cars, the limits are $300,000 for married filing jointly, $225,000 for Head of Household, and $150,000 for single clients. For used cars, the limits are $150,000 for married filing jointly, $112,500 for Head of Household, and $75,000 for single clients.
Here are other changes related to the Clean Vehicle Credit.
- The manufacturer limitation is eliminated for cars sold after December 31, 2022
- Vehicles must receive final assembly in North America*
- Vehicles must come from a qualified manufacturer
- Manufacturer’s suggested retail price for vans, small sport utility vehicles, standard sport utility vehicles, small pickup trucks, standard pickup trucks, and minivans is limited to $80,000, and other cars are limited to $55,000
*New electric vehicles purchased after August 17, 2022, must receive final assembly in North America to qualify for the credit. However, if your client entered into a binding contract to purchase a new electric car before the Inflation Reduction Act passed, they could follow the previous rules.
The Inflation Reduction Act also adds a credit of up to $7,500 for new commercial clean vehicles after December 31, 2022. This will aid business owners with their taxes, so mention this to your clients.
Update: The IRS issued a notice that modifies the definitions of certain vehicle classifications for the new, previously owned and qualified commercial clean vehicle credits in February 2023. Learn more here.
Extended – Credit for electric chargers installed at your client’s home or business
The act extended this existing credit for charging stations installed before January 1, 2033.
Increased – Energy credits for your client’s home
Before the Inflation Reduction Act, your client could take a credit of up to 10% of the amount paid for nonbusiness and residential energy-efficient items like windows, doors, and skylights placed in service before January 1, 2022. The act increased the credit for up to 30% for items placed in service before January 1, 2033.
The act also eliminates the lifetime credit limit. It also now limits the credit per taxpayer per year.
Increased – Credits for solar energy
The act increased the previous credit for solar energy items, such as panels and water heaters, from 26% to 30% of your client’s purchase. This applies to energy-efficient equipment purchased from January 1, 2022 through December 31, 2032.
What are the healthcare tax changes for my client?
Before the Inflation Reduction act, a credit called the Premium Tax Credit allowed clients with income above 400% of the Federal Poverty Level to claim a credit when they purchased health insurance from the Marketplace. Now, these benefits will continue for these clients.
The act also caps Medicare beneficiaries’ out-of-pocket expenses for prescription drugs at $2,000 per year. In addition, the new act will allow Medicare to negotiate prices on some of the more expensive drugs on the market.
What are the tax changes for my clients with corporations?
If your client has a corporation that makes 1 billion dollars or more, they will be charged a 15% minimum tax. They will also be charged 1% of the fair market value on the repurchased stock.
How will the Inflation Reduction Act affect tax preparers?
The IRS budget increased from $13.7 billion to $21.7 billion, a 63% increase. The organization has six months to detail how they will allocate these funds. TaxSlayer Pro will update this blog when more information is available. This budget increase will likely affect tax preparers in some way. Some details already outlined include:
The Inflation Reduction Act includes additional annual spending of $670 million for “program enforcement,” which is said to improve enforcement on existing taxpayer reporting, including Schedule C filings, self-employment, and stock basis issues.
Core technology improvements
The Inflation Reduction Act includes an additional $450 million annually for “core technology improvements.” This is said to be used for enhanced technology to capture inconsistencies in tax filings. This would consist of improving IRS software and other technology to help match different source documents to the amounts being reported on the return.
Corporate and higher income enforcement
The most significant additional resource allocation in the act is funding for significant corporate and higher income enforcement efforts. This will be accomplished by providing an additional annual budget of $4.5 billion to hire more auditing and legal staff. This effort is focused on taxpayers with income over $400,000 and entities.