On August 16th, President Biden signed the Inflation Reduction Act of 2022 into law. I’ll stay out of the debate on whether the Act will actually reduce inflation, but whether that’s true or not, the 273 pages of changes and additions to existing law will have some effect on many of our clients. Many of the provisions of the Act impact corporations exclusively (including a new 15% minimum tax, and the new 1% excise tax on stock buybacks), so I’m going to leave them out of this summary. The changes for individuals include the following:
1) Modifies the Non-Business Energy Property Credit (this is the credit for energy efficient windows, doors, roofs, etc.) starting in 2023 by extending it through 2032 and making it more robust:
- The $500 lifetime limit is changed to a $1200 annual limit, though individual types of property have lower limits.
- The rate increases from 10% of the cost to 30%.
- Home energy audits (30% up to $150) are now included as eligible for the credit, as well as exterior doors (30% up to $250 per door, $500 total), windows (30% up to $600), insulation (30% up to $600), heat pumps (30% up to $2k, not capped by $1200 overall max), HVAC units / water heaters / furnaces / boilers (30% up to $600), electrical panel upgrades to at least 200 amps as part of other energy efficient improvements (30% up to $600).
Energystar.gov will have updated information on each credit by end of 2022. That’s the most reliable site for ongoing energy credit information.
2) Extends the Residential Energy Efficient Property Credit (think solar panels on your roof) through 2034. This 30% credit had started to phase out and was reduced to 26% for 2022, on its way to zero in the coming years. Instead, 2022’s credit has been restored to 30% and that continues through 2032, phasing down to 26% in 2033 and 22% in 2034.
3) Replaces the old Qualified Plug-In Electric Vehicle credit ($7500 for qualifying electric vehicles but only for the first 200k vehicles sold by manufacturer) with the new Clean Vehicle Credit. This new credit:
- Runs from 2023 through 2032.
- Remains capped at $7500 (lower, depending on vehicle sourcing and assembly).
- Includes other alternative powered vehicles (e.g. hydrogen fuel cell)
- Has income restrictions… $150k single, $225k head-of-household, and $300k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify). These are cliffs meaning that if you are even $1 over the limit, you receive no credit. It does not phase out slowly like most credits / deductions.
- Has MSRP restrictions… cars with MSRP over $55k and SUVs / light trucks over $80k are excluded.
- Requires that final assembly of the vehicle occurred in the US and that a certain percentage of the minerals used to make the battery were sourced from North America or certain other countries that have trade agreements with the US. These restrictions get tougher in later years (40% by 2024, 100% by 2029).
- Does not have manufacturer sales caps (i.e. Tesla’s that meet the above requirements would qualify).
- Allows purchasers to transfer their credit to the auto-maker starting in 2024 (means you get the credit as a discount off the purchase price, vs. having to pay full price and claim the credit on your taxes. No details on how this will actually work.
For 2022, the old rules apply, except that the new assembly requirements are in effect as of the signing of the Inflation Reduction Act. The Dept. of Energy has published a list of qualifying vehicles. If you were in a contract for delivery prior to 8/16 and receive delivery prior to the end of 2022, a special transition rule allows you to treat the vehicle as delivered on 8/15 (i.e. no assembly requirements).
The provisions of this credit are very complex. The conclusion here is to check with the manufacturer before making the final decision on what kind of car you want to buy and assuming the credit will be available. The sourcing / assembly restrictions, combined with the MSRP limits could make it tough for vehicles to qualify, especially early in the life of the credit.
4) Creates a new Previously Owned Clean Vehicle Credit that:
- Runs from 2023 through 2032.
- Is valued at the lesser of $4000 or 30% of the vehicle cost.
- Applies to clean vehicles that are at least 2 years old.
- Has income restrictions… half those of the credit for new vehicles ($75k single, $112.5k head-of-household, and $150k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify). These are cliffs meaning that if you are even $1 over the limit, you receive no credit. It does not phase out slowly like most credits / deductions.
- Has vehicle value restrictions… vehicles over $25k are excluded.
- Has use restrictions… Can only use the credit once every 3 years. The credit can also only be applied once per vehicle.
5) Creates the new High-Efficiency Electric Home Rebate Program. This program provides qualifying low and middle-income families a total rebate of up $14k to purchase energy-efficient electric appliances. This includes up to $8,000 to install heat pumps, $1,750 for a heat-pump water heater, $840 for a heat-pump clothes dryer or an electric stove, $1600 to insulate and seal a house, $2500 on improvements to electrical wiring, and $4000 toward upgrade of electrical panels. The program will be administered by the states (states have to apply for their share of the $4.5B of Federal funding and there doesn’t seem to be any guarantee that all states will, or that their programs will exactly match those described above) and only those earning less than 1.5x the area’s median household income will qualify. The rebate can’t exceed 50% of the cost of the project if the family income is between 80-150% of the area median income.
An additional, more generalized rebate program, also administered by the states is also available. A retrofit that reduces a home’s energy use by at least 35% via insulation or other improvements is eligible for up to an $8k rebate, or 80% of the project cost, whichever is less. For smaller projects that reduce usage by 20-35%, a $4k rebate is available.
6) Extends two ARPA provisions dealing with the ACA (“Obamacare”) through 2025. As a result, those earning more than 400% of the Federal poverty line will still qualify for subsidies if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income. Without this extension, in 2022, the income cap would have been $51,520 for an individual in most of the country, and $106,000 for a family of four.
7) Modifies Medicate Part D and Medicare Advantage Plans to:
- cap monthly insulin costs at $35, starting in 2023.
- eliminate additional out-of-pocket costs, starting in 2024, for enrollees who end up with enough covered prescription drug bills to qualify for catastrophic drug coverage. This differs from today’s structure where enrollees still pay 5% of the bills even after they hit catastrophic coverage protections.
- cap annual out-of-pocket drug costs at $2000, starting in 2025
- allows Medicare to negotiate certain drug prices with manufacturers for the first time starting in 2026.
8) Increases funding for the IRS by $80 billion. While this isn’t a provision directed at individuals, it’s possible it could impact you since a bigger IRS budget means more enforcement (i.e. audits), but, on the bright side, better taxpayer service. Commissioner Rettig has written a letter describing what the IRS plans to do with the money, in case anyone wants his perspective.