Mike’s Tax Bites – Inflation Reduction Act

Last week President Biden signed the inflation reduction act of 2022. There are numerous aspects of this new law that will affect all taxpayers. The aspect of the new law getting the most press is likely the boost in funding to the Internal Revenue Service. I will address those changes in my next tax update.

The key elements of the law, other than the IRS provisions, include:

  • 15% corporate alternative minimum tax, which will only impact corporations whose financial statement income exceeds $1 billion over a three-year period
  • 1% tax on stock buybacks of publicly traded stocks
  • An extension of the American Rescue Plan Act provision allowing taxpayers with household income 400% or more above the federal poverty line to potentially obtain premium assistance when purchasing marketplace insurance
  • Extension of the $7,500 credit for new alternative fuel vehicles and a $4,000 credit for used alternative fuel vehicles. A list of eligible vehicles is available on the U.S. Department of Energy website.
  • Numerous energy credits for improvements to taxpayer homes.
  • No elimination of the carried interest provisions of current law.

While the corporate provisions will not affect most taxpayers, some of the energy credits may. The old $500 lifetime credit for certain energy improvements to one’s home was slated to be phased out this year. The inflation reduction act brings back that $500 credit for improvements made in 2022. However, the credit more than doubles for improvements made in 2023 through 2032 replacing the 2022 lifetime limit with a $1,200 annual limit. This new credit in 2023 includes the cost of installation which was not in the prior law. However, the credit is limited to 30% of eligible expenses.

As with any piece of tax legislation, the devil is in the details. The new law has an annual limit of $600 for windows and a $2,000 limit for replacement of a heat pump which is at least 75% efficient. There is a credit of up to $150 for a home energy study and a 30% credit subject to the annual limit for placing an electric panel with at least 200 amp service.

If you are looking to do home improvements that are energy efficient, the new law provides a number of tax planning opportunities. The obvious move is to wait until 2023 to implement any changes to get the larger credit. If you are thinking of replacing windows, one should be aware of the annual limit of $600 and consider spreading the job over several years if the cost of window replacement will be more than the limit.

There are numerous other opportunities in this new law to potentially save tax. This year more than ever, taxpayers should seek competent tax advice before year end to plan for the new law.