Politics aside, the Inflation Reduction Act (IRA) introduces several new and expanded tax credits designed to help Americans shoulder the cost of certain home improvements, vehicle purchases, and healthcare costs. I have outlined the major provisions below.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement credit is available for the purchase and installation of qualified energy efficient home improvements, including windows, skylights, and doors. The current credit amount is 10% of the total purchase price and is subject to a $500 lifetime limit. The Act extends the credit through 12/31/2032 and increases the credit amount to 30% with an annual per-taxpayer limit of $1,200 (and $600 per-item limit). The annual credit limit for doors and windows has also increased. A 30% credit (up to $150) will also be available for home energy audits. A home energy audit is an assessment of your home, done by a professional, which analyzes your home’s current energy consumption and identifies energy efficient measures you can take to make your home efficient (think home inspection, but for energy usage).
* While most provisions of the IRA apply to property placed in service (purchased) after 12/31/2022, the tax credits for qualified energy efficiency improvements, residential energy property expenditures, and home energy audits are effective for property placed in service after 12/31/2021.
Clean Vehicle Credit (formerly called the Electric Vehicle Credit)
Currently, there is a cap of 200,000 vehicles sold per manufacturer to be eligible for the Electric Vehicle Credit which makes most of the more well-known manufacturers and models ineligible. The Inflation Reduction Act removes the limit on the number of vehicles sold beginning in 2023, meaning eligible models manufactured by Tesla and GM would once again qualify for the credit. However, there is a clause in the new regulation that limits eligibility for the credit to the purchase of vehicles that are manufactured in North America and powered by batteries with materials sourced from the U.S., or eligible trade partners. The credit would also be disallowed for certain higher-income taxpayers. No credit is allowed if the current year or preceding year’s Adjusted Gross Income exceeds $300,000 for joint filers ($150,000 for single filers). There is also a retail price limit of $80,000 (for vans, SUVs, or pickup trucks) and $55,000 for all other vehicles to qualify for the credit. The credit is non-refundable and is capped at $7,500. One piece of good news is that, beginning in 2024, taxpayers who purchase eligible vehicles will have the option to claim the full amount of the eligible credit at the time of purchase, instead of having to wait until they file their tax return.
Credit for Previously Owned Clean Vehicles
This is a new tax credit for buyers of pre-owned qualified clean (plug-in electric and fuel cell) vehicles. The credit amount is capped at $4,000, is also non-refundable, and is limited to 30% of the purchase price. To be eligible for the credit, vehicles must have a price of $25,000 or less, with a model year that is at least two years earlier than the year of purchase. There are lower income thresholds to qualify for this credit ($150,000 for joint filers, and $75,000 for single filers). The credit for pre-owned clean vehicles is effective for purchases between 1/1/2023 and 12/31/2032. One other item to note is that the purchase must be from a dealer, and person-to-person or private sales do not count.
Other Notable Updates
The IRA also extends the Affordable Care Act’s Premium Tax Credit provided in the American Rescue Plan Act (ARPA), including allowing higher-income households to qualify for the credit while boosting the subsidy for lower-income households, through the end of 2025.
In addition to new tax credits, the Inflation Reduction Act provides nearly $80 billion in funding to the IRS over the next 10 years to assist with tax code enforcement and taxpayer services, among other items. While an expanded IRS may seem intimidating at first, these investments are meant to help all taxpayers from the pre-filing stage to collection of taxes, and all areas in between by improving the infrastructure and efficiency of the IRS (and hopefully faster refunds!).
As this article shows, sifting through U.S. tax laws can be… taxing. At Pathfinder Wealth Consulting, we review our clients’ tax returns annually as an on-going part of their comprehensive financial plan, to see how changes like these may impact their entire tax situation. If you have questions about the interconnection between your tax situation and your investment portfolio, and the impact on your financial plan, please give us a call at 910-793-0616. We are here to guide you forward.