Summary of Inflation Reduction Act

• First, roughly $370 billion in Clean Energy Investments and Tax Credits. The main focus being on electrical vehicles and maintaining the existing Nuclear Power Plants in the United States.
• Second, allowing negotiating of prices of some drugs for Medicare and capping out of pocket prescription drugs for those on Medicare at $2,000 effective in 2025. 
• Third, increased taxes on corporations making $1 billion dollars or more of income while doubling the IRS budget by $80 million to help enforce it.

I believe there are 5 potential Tax Benefits for you in this bill depending upon your situation. Stay with me and I’ll explain what they are AND what the increase in the IRS budget may mean for you.

This nice thing about this bill for my family and probably yours is clearly the target is large corporate businesses making $1 billion or more, not you and me. But, you are living in a fantasy land if you don’t think those large companies like Nike, Target, and Walmart aren’t going to protect their profits and pass those increased costs on to us in the form of rising prices.  When costs go up, prices go up. It’s that simple yet not often understood by lawmakers.

IRS Budget Increase of Inflation Reduction Act

There is $80 billion dollars going to the IRS roughly doubling the size of the IRS.  Supposedly this money will go to enforcement on these large corporations.  Do you really think they are going to use that money to go after businesses with an army of lobbyists and huge accounting firms? No way!  They are coming for middle America.  Small businesses, entrepreneurs, influencers, and individuals that do well for themselves and provide jobs for the vast majority of Americans.

But, there are ways you can protect and prepare yourself.  The #1 way to protect yourself is to document, document, document.  I always talk about this with my clients and on my trainings.  And in my next post I’ll give you ways to reduce the likelihood of getting an audit.  

What Tax Benefits Are in the Inflation Reduction Act?

As I said in the beginning, there is roughly $370 billion dollars of clean energy investment and a large portion of that is in tax credits.  Tax credits are much more valuable than tax deductions because credits reduce taxes owed, not just reduce your taxable income.

The first tax credit is the non business energy tax credit on your home.

If you’re planning a few home improvements that will boost the energy efficiency of your house, you may save some money If you purchase something like a new air conditioning or heating unit. Kind of like the one I just had to purchase for my office after the electrical fire a few weeks back, or new energy efficient windows, doors, or energy efficient appliances. Too bad the credit doesn’t take effect until 2023.

It used to be that you could only get $500 worth of credits over your lifetime and only $200 for windows.  Now starting in 2023 the credit is 30% of the costs for all eligible improvements made during the year up to $1,200 of credits per year.  There are some limits for specific items like doors and windows and roofing and ceiling fans are no longer eligible.  Make sure you are speaking with your tax preparer about any home improvements you make during the year.

The second tax credit is what’s called the residential clean energy credit. 

It’s been around for a while but was extended and improved.  In 2022 and 2023 if you install solar, wind, or geothermal systems on your property you get a 30 percent tax credit on what you spent.  Not a 30 percent deduction, a 30 percent credit on taxes. If your solar install costs you 50,000 dollars you receive 15,000 of tax credits. For someone in higher tax brackets that is a big benefit and incentive. Not to mention the potential energy savings over time.

Third Tax Benefit is for Depreciation of Clean Energy Installation at Home Office.

Ok, now let’s say you own a business and have a dedicated home office. Let’s say your home office is 15% of your total home square footage.  You can take 15% of the cost of the solar installation and depreciate that over time or potentially in an accelerated fashion giving you an additional business tax deduction on top of the 30% tax credit.  That is a nice bonus for people with a dedicated home office who choose to install solar, wind, or geothermal at their home.

Commercial Electric Vehicle Tax Credit for Business Owners

The fourth tax credit is exclusively for business owners. There is now a $7,500 commercial EV tax credit available for buying an EV less than 14,000 pounds. Basically excluding only semi trucks.  If you purchase one above 14,000 lbs. the credit maxes out at $40,000. There is no income restriction and no manufacturer restriction.  So if you have a car for your business, the government is paying you to buy an EV.

The fifth and final tax credit is the expansion of the personal Electrical Vehicle credit. 

But I must warn you there are a lot of limits here.  I could do an entire post on it.  Starting in 2023, You now receive $7,500 for a new electric vehicle no matter the make and model as long as it is assembled in America and $4,000 for a used one.  Here is a link to the 20 EVs that qualify now.  However there is an important catch. In 2022, there is no income cap. But, Now that the credit was raised, there is an income cap on the receiving the credit starting in 2023.  You must make less than $300k of Joint Income and $150k if single for the new car credit and $150k joint income or $75k single on the used car credit.

If you buy a EV in 2022 you still have a limit where the credit is only for companies that haven’t sold 200,000 EVs. No Tesla, GM or Toyotas and at the time of filming Ford is very close. But you don’t have that income limit.  So if you are a high income earner and were looking at buying an EV in 2023, you may want to speed up your purchase to 2022… if you can even find one.

Also in 2023 there is a new MSRP limit that goes into effect so the credit is only for cars that are less than $55k for new cars and $80k for pick ups all in. So it incentivizes more affordable EV production.

The other thing to consider here, is that while this is a great incentive, demand for EVs is very high, and supply chain issues have inventory very low.  There are long wait lists.  So, its very hard to actually buy an EV to get the credit. It might make sense to get on a waitlist now to take advantage in 2023.  Because if you sign an agreement to be on a waitlist in 2022 and it gets delivered next year, you get to choose which rules apply to you.

I hope this helped you get a handle on what the Inflation Reduction Act really means.  In my opinion, it may actually increase inflation. But, there are some ways you can potentially get some tax savings if you are strategic about clean energy purchases.

Get Clear. Be Clear.

Colin B. Exelby, CFP®

The post Inflation Reduction Act: What Tax Savings Are in it for You? appeared first on See The Forest Through The Trees.