Inflation Reduction Act Tax Credits: What You Should Know

You may have heard about the Inflation Reduction Act (IRA), a sweeping piece of legislation signed in the last two years, designed to address some of the significant issues that the U.S. is facing. Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and the need to raise tax revenue. But did you know that the various clean energy tax credits and other tax incentives in the IRA might benefit you?

Inflation Reduction Act: Small business and middle-class income taxes

The good news for most is that the IRA is not designed to increase taxes on small businesses or families that make $400,000 or less. However, since the law is still relatively new, the actual tax effect over time remains to be seen.

Under the IRA, however, some corporations may pay more tax than they currently pay. For example, under the legislation, large businesses with more than $1 billion in reported income will be subject to a 15% minimum corporate tax rate. The IRA also includes an excise tax on corporate stock buybacks.

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Those provisions are designed to address the fact that some very large companies you may be familiar with, like Nike or Amazon, pay very little in federal taxes. 

Affordable Care Act premium tax credits

The Inflation Reduction Act also extends the expanded Affordable Care Act (ACA) program through 2025 so eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to benefit from lower health care premiums.

The Affordable Care Act’s premium tax credit was designed to help people with low and middle incomes pay for health insurance purchased through the healthcare marketplace (i.e., HealthCare.gov). Health insurance can also be purchased through some state exchanges.

Eligibility for the ACA premium tax credit program was temporarily expanded during the COVID-19 pandemic to allow more individuals and families to claim the refundable tax credit. As a result, the ACA premium tax credit is extended for three more years, which means that more people will likely qualify for the premium tax credit, and some will receive a larger credit.

For more information about how the IRA can impact ACA premiums, see: The Inflation Reduction Act Will Boost Obamacare Tax Credit.

Clean energy tax credits for homeowners

To support clean energy, the IRA provides new tax credits. Other energy-related tax credits are extended — some of which could benefit homeowners.

Solar Project Tax Credit: For example, the law includes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. The tax credit that applies to solar panels can be beneficial on its own, of course. But it also has potential positive implications for people interested in using solar panels to charge their electric vehicles. That’s because if you are eligible for both home and residential solar tax breaks and the federal EV charger tax credit, you could reap the benefits of two significant clean energy tax incentives in the new law.

The solar project tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.

Besides solar incentives, affordable housing could also increase because the Inflation Reduction Act creates a $1 billion incentive program for energy-efficient affordable housing.

For more information about how the IRA can impact homeowner tax credits, see Tax Credits for Energy-Efficient Home Improvements.

EV tax credit

The Inflation Reduction Act also contains provisions for an electric vehicle tax credit. The existing tax credit for buying a new or used electric vehicle is extended for 10 years — until December 2032. 

The federal EV tax credit applies to any “clean vehicle,” which, for example, now includes hydrogen fuel cell cars.

However, the IRA sets income limits on who can claim the EV tax credit and limits the manufacturers' retail sales price (MSRP) of the cars that qualify for the EV tax credit. Those limits effectively exclude higher-priced luxury electric vehicles. 

The IRA also removed the 200,000-car cap for claiming the EV tax credit, to allow manufacturers like Tesla, General Motors, and Toyota to qualify for the taxcredit.

Also, there is an EV tax credit change beginning this year, 2024. Eliglbe car buyers can take the EV tax credit as a discount at the time of the car purchase. You are effectively transferring the credit to a registered dealer who could reduce the price of the vehicle by the EV tax credit amount. That means you don't have to wait until you file your tax return to benefit from the federal clean vehicle tax break.

The IRA also revives the federal EV charger tax credit for electric vehicle charging stations and equipment that had expired a couple of years ago.

For more information about how the new law will impact EV tax credits, see How the EV Tax Credit Works and The Federal Tax Credit for EV Chargers is Back.

IRS Enforcement

The Inflation Reduction Act includes $80 billion of additional funding over ten years for the IRS. The idea is that the funds could help improve tax compliance, which in turn, could bring in an estimated $203 billion in increased revenue.

It's important to note that some of those funds have since been clawed back in budget negotiations, but the IRS will likely use a significant portion of the funds to improve IRS tax enforcement with high earners. 

That might also include increasing staffing levels, modernizing outdated processing systems, and improving IRS operations.

Medicare prescription drugs

In addition to clean energy tax credits and higher taxes for some corporations, the IRA contains provisions that allow Medicare to negotiate lower prices for some prescription drugs.

A key change is that out-of-pocket costs for covered Medicare prescription drugs will be capped at $2,000 per year, beginning in 2025. That cap will be adjusted yearly for inflation. As of January 2023, people who take insulin and have Medicare prescription drug coverage will have their out-of-pocket cost capped at $35 for a month’s supply. 

Additionally, under the IRA, Part-D, adult vaccines for people with Medicare were available at reduced cost beginning in 2023.

The Centers for Medicare and Medicaid Services has more information on how the IRA impacts the costs of Medicare prescription drugs.

Clean energy tax incentives in the Inflation Reduction Act

As you can see, the Inflation Reduction Act changes some current tax credits that impact eligible homeowners and EV buyers. It also shifts some longtime tax policy —particularly for certain large corporations.

And while all the tax changes in the IRA may not impact your tax bill, a few extended and enhanced tax credits might save you some money when it's time to file your federal tax return.

Related

• How the EV Tax Credit Works
• The Federal Tax Credit for EV Chargers is Back
• Tax Credits for Energy-Efficient Home Improvements