Tax-Related Provisions in the Inflation Reduction Act

Although I will not comment on whether this Inflation Reduction Act will actually reduce inflation on its own (it won’t), I will summarize a few key provisions of this new legislation signed into law on April 16, 2022.  While it is primarily a climate and environmental bill, there are a few relevant tax provisions and provisions that impact Medicare that I wanted to highlight.

1.  Premium Tax Credit Extension.  The more favorable rules (created under the American Rescue Plan) regarding the premium tax credit were extended to 2025.  In general, premium tax credits provide for generous subsidies on ACA Marketplace health insurance premiums for those that make under a certain amount of income.  This can be especially beneficial for those that retire before Medicare age.  It does not matter what one’s net worth is – as long as assets and income can be structured appropriately, tens of thousands of dollars can be saved on an annual basis in some circumstances.

The legislation basically provides more generous subsidies at the lower income levels and did away with the “cliff  income limit” through 2025, effectively allowing some of those with higher incomes to potentially benefit from these subsidies.

2.  Clean Vehicle Credit.  The revised tax credit for the purchase of elective vehicles.  While the electric vehicle must have its “final assembly” done in North America, this tax credit is available for elective vehicles at certain price points for those with incomes under a certain level.

• Eligible cars.  For sedans/hatchbacks, the cap is $55,000.  For trucks, SUVs, and vans, the cap is $80,000.  For used cars (defined as the first-time re-sell after two years of initial purchase), the cap is $25,000.  Thus, if the car price is over this amount, no credit can be obtained.  In addition to the final assembly rule, there are additional rules about what percentage of the battery needs to have been made in North America. Those rules are somewhat different for used cars.  
• Income levels.  For new cars, taxpayers cannot take the credit if their adjustable gross incomes exceed $150,000 (single filers) or $300,000 (joint filers). For used cars, the limits are $75,000 (single filers) and $150,000 (joint filers).  You can’t make up these laws, folks. 
• Amount of credit.  The credit is the minimum of 30% of the cost of the vehicle or the max amount.  The max is as follows: $4,000 for used vehicles, $7,500 for new vehicles.   Adding to the complexity, the size of the battery impacts the size of the credit.  Who said simplification of the tax code is a worthy goal?
• Non-refundable credit.  The credit is non-refundable, meaning that if a taxpayer does not have a tax bill that is more than the credit, the effective credit is limited to the tax bill.  The taxpayer does not get the balance in cash (as would apply for refundable credits).
• No more sales cap.  That previous sales cap that applied per manufacture is no longer relevant as of January 1, 2023.

Thus, this could be a beneficial tax credit for those looking to buy a below average-priced EV if their income is below the threshold.  There are still good EVs at this price point.  The problem, however, is that not many EVs have their final assembly done in North American.  That very objective of getting more EVs and having more battery components built in North America is one purpose of the legislation, but it might be some time before many cars qualify.  (Some suggest that this goal will be difficult to meet and may result in slower progress in going to more EVs.)  Here’s a source that attempts to classify eligible vehicles, or “EVs” that are ”EVs: US Department of Energy EV List.   It’s quite complicated and unknown about what EVs will qualify now and in the future as the various rules and supplies change.  Stay tuned for more!  These credits expire after 2032.

As there are many details left out with the explanation above, here’s a more official Q&A from the treasury - More Info.  Regulations are expected to come out to clarify the details.

3.  Home Improvement Credits.  Under the Energy Efficient Home Improvement Credit, taxpayers can receive up to a 30% credit for some energy-efficient remodeling costs. The cap is at $1,200 annually. This new credit is similar to the expired Nonbusiness Energy Property Credit, but it is more expansive and provides more benefits.  While this old credit will apply for 2022, the new EEHIC will apply starting in 2023.  While there are more details, it is worth considering and potentially spreading out your improvements to maximize the use of this credit. This credit is legislated to expire after 2032.        

Another similar credit, Residential Clean Energy Credit, was also passed as an extension of a previous tax credit (Residential Energy Efficient Property Credit) with various adjustments.  Finally, there is the High-Efficiency Electric Home Rebates that provides rebates for the purchase of certain appliances for those with lower income. 

4.  Medicare drug pricing.  While this does not have a direct tax impact, certain drug costs may be lower for two reasons.  First, the government will now be able to negotiate Medicare drug pricing with pharmaceutical companies for some qualifying prescription drugs.  Those applicable drugs will be unveiled and phased-in over the coming years.   Also, and perhaps more significantly, individuals on Medicare will now have a cap on out-of-pocket expenses on prescription drugs at $2,000. Finally, there is a cap on insulin at $35/month, and the law eliminated the cost-sharing requirement for vaccines.  For a more thorough analysis on these issues, please see KFF's Summary. 

While it is interesting to note what is included in the legislation, it is also interesting to consider what was not included in the final legislation.  It excludes a change to the estate tax laws, a change related to the strategy known as “backdoor Roth IRAs”, a change in tax rates, extension of the more generous child tax credits, and carried interest rules.

We will continue to keep you posted on recent developments and tax legislation. Being nimble and analyzing how these tax laws impact your situation over a multi-year basis is the key to minimizing your long-term tax liability.