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Will the Inflation Reduction Act Affect Your Income Taxes?

Tax Planning

The Inflation Reduction Act is gaining attention as the new legislation promises to deal with various issues the American economy is currently facing. President Joe Biden signed it into law on August 16, 2022, and it has been the topic of discussion at Capitol Hill for quite some time now.

As an American citizen, you might wonder what it means for you. The most important aspect of the Inflation Reduction Act is to deal with the climate change issue. It focuses on taking relevant actions to mitigate the impact of climate change and slow down the trajectory of global warming.

Most notably, green energy credits are an important part of the Inflation Reduction Act since they can help you get your home and vehicle tax credits. Another important element of the Inflation Reduction Act that affects the taxpayers is related to healthcare.

How Does The Inflation Reduction Act Affect Average Americans?

The major element of the Inflation Reduction Act is related to health care. It will impact people with Medicare who take certain medications. Moreover, it will also affect those who count on premium assistance for Affordable Care Act coverage.

The legislation will also affect various large organizations significantly. They’ll have to pay a 15% minimum corporate tax and a 1% excise tax on stock buybacks.

Major Provisions of the Inflation Reduction Act

Apart from the provisions for the healthcare sector and corporations, there are other major provisions that you need to know about. These provisions in the Inflation Reduction Act can influence future decisions for buying your car and other things.

Green Energy Tax Credits

Suppose you already purchase or are planning on buying energy-efficient doors and windows and appliances such as ACs, water heaters, etc. In that case, you might be aware of the Non-business Energy Property Tax Credit. It reduces the tax paid on an item you use to make your home more energy efficient.

While the tax credit expired in 2021, it has been extended through the 2022 tax year. While the tax credit aimed to help you want to replace major household items, there were numerous restrictions on this credit that made it difficult for people to access it.

According to the Inflation Reduction Act, the new Energy Efficient Home Improvement Credit in this legislation will replace the old credit. From the start of the tax year 2023, the credit will:

  • Not be applicable on air-circulating fans or roofing
  • Be equal to the 30% expenditure that you would bear for your home improvements
  • Be subject to all relevant updates for the energy-efficiency standards

Cover your costs for home energy audits, some boilers, biomass stoves, and equipment related to electric panels.

Moreover, it will also increase the limits for certain types of eligible improvements. For instance, an individual can now claim up to $2,000 as a tax credit for some improvements such as:

  • Heat pump water heaters
  • Gas heat pumps
  • Biomass stoves and boilers

Furthermore, it will also give you a tax credit for almost $600 if you spend on energy-efficient things such as water heaters, exterior windows, etc. For energy credits, the lifetime limit will not be more than $500.

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Instead, you can claim around $1,200 yearly, but you must provide purchase documentation after 2024. You can use the product identification number for each purchase you want to include on your tax returns.

The Clean Vehicle Credit

Another important element of the Inflation Reduction Act is the Clean Vehicle Credit. The US government has been giving certain tax breaks to customers who purchase electric vehicles since 2009. Internal Revenue Code (IRC) Section 30D which is still in force to this day allows you to get tax credits of up to $7,500 if you purchase

  • Electric vehicles
  • Fuel-cell (hydrogen) cars
  • Plug-in hybrid electric cars

This tax credit is non-refundable, preventing you from claiming more than what you have in taxes for the year you purchase the electric vehicle and put it into use. For instance, if you own $6,000 in tax credit, that is the maximum you can claim.

There wasn’t any change in this tax credit until the Inflation Reduction Act came along. While Congress did try to increase the limit for this credit to $12,000 in the Build Back Better Bill, it failed to go through Senate.

The credit limit stays at $7,500, but the name has changed to Clean Vehicle Credit. Moreover, it would now be challenging for you to claim the credit due to the new provisions in the Inflation Reduction Act.

There are two restrictions for each half of the tax credit. The first restriction is on the first $3,750 for where the material for the batteries is mined, and the second restriction is on the second $3,750 for where the batteries are made. Although the US isn’t an industry leader on either count, Congress is working on it.

Other Provisions of the Inflation Reduction Act

Besides the above provisions of the IRA, there are some also elements of the legislation that might affect you, such as:

  • The out-of-pocket expenses for the drug costs are now $2,000 annually. Moreover, Medicare can now bargain to reduce drug prices in a few years.
  • The Affordable Care Act. Premium assistance has been extended to 2025.
  • The goal to reduce the deficit is now set at $300 million.
  • The IRS will be adding new agents to its workforce. It will also get around $80 billion for this purpose and to improve customer service and general operations.

There is still some news pending about the Inflation Reduction Act, but we will continue to update you about the impact of this massive new legislation.

Understand the Impact of the Inflation Reduction Act on Your General Income Tax Planning

If you are wondering how the provisions in the Inflation Reduction Act can impact your finances and taxes, we are here to help you with it. We can also look at your financial situation and help you make the most out of the credits available in the Inflation Reduction Act.

You can better understand the provisions on protecting the environment, home energy tax credits, electric vehicle tax credits, and much more. Contact us today, and we will be more than happy to assist you.

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