Inflation Reduction Act (IRA) of 2022

Inflation Reduction Act

The Inflation Reduction Act (IRA) signed by President Biden Aug. 16 includes a variety of tax provisions that will impact U.S. businesses and individuals. While some of the changes have received a great deal of media attention, others may come as a surprise to those who have not been following the legislative process closely:

• Extending the health insurance premium tax credit provisions of the American Rescue Plan Act of 2021 through 2025.

• The out-of-pocket expenses (with receipts) that educators can claim as a deduction increased to $300 for 2022, up $50 from last year.

•  Extending the $10,000 ($5,000 MFS) state and local tax (SALT) limitation through 2026.

• The IRS continues to expand its efforts to locate taxpayers who are using cryptocurrency to avoid taxation. The IRS treats cryptocurrencies such as Bitcoin and Ethereum as property, and taxpayers are required to pay the capital gains tax on any profits they earn by buying and selling virtual currency.

Clean energy and efficiency provisions

The IRA includes 30 provisions that implement a broad range of tax incentives to encourage the use of clean energy and improve energy efficiency. Some of the more notable incentives include:

• A tax credit of up to $7,500 for buyers of qualifying plug-in electric and fuel cell vehicles with a manufacturer’s suggested retail price of up to $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles.

• A new tax credit of up to $4,000 for buyers of previously owned plug-in and fuel cell vehicles that is limited to 30% of the vehicle’s purchase price.

• A new tax credit of up to $7,500 for qualified commercial clean vehicles weighing less than 14,000 pounds and up to $40,000 for larger vehicles. The credit is now known as the clean vehicle credit, and the IRA of 2022 placed several restrictions on the credit that may make it difficult for some buyers of electric vehicles to take advantage of this credit.

• The changes that are expected to have the broadest impact include caps on the income of the taxpayers eligible for the credit, a limit on the retail price of qualifying vehicles and new sourcing requirements. Starting in 2023, only households with incomes of up to $300,000 qualify for the credit, with the credit limited to individual taxpayers with incomes below $150,000. Additionally, only battery-powered cars priced at less than $55,000 are eligible, or $80,000 for vans, SUVs, and trucks. Finally, final assembly of the vehicle must have been in North America, and the materials from which it is constructed must meet specified sourcing requirements.

• The nonbusiness energy property tax credit was renamed the energy efficient home improvement credit and extended through 2032. Beginning in 2023, the credit amount will be 30% of the costs of eligible home improvements made during the tax year, with a $1,200 annual limit. The specific annual limits for improvements are:

• $150 for home energy audits

• $250 for exterior doors meeting Energy Star requirements ($500 total for all doors)

• $600 for windows and skylights meeting Energy Star’s most efficient certification requirements

• $2,000 for specified heat pumps and heat pump water heaters, biomass stoves and boilers (neither the $1,200 annual limit on total credits nor the $600 limit on other qualified energy property applies to this amount)

•  $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; water heaters powered by natural gas, propane, or oil; oil furnaces and water boilers