How The Inflation Reduction Act Affects Your Taxes
The Inflation Reduction Act was signed to alleviate Americans' burden during 2022 due to the rise in consumer prices because of inflation. As a result, there were changes made that could affect your taxes.
If you want to know how these changes affect you, this blog can help.
The Inflation Reduction Act includes an additional $80 billion in funding for the IRS over ten years. The funds are intended to help improve tax compliance, resulting in an estimated $203 billion in additional revenue.
It is unclear how the money will be spent, but lawmakers anticipate that the IRS will use $45 billion to improve tax enforcement.
This could include increasing staffing levels and updating outdated processing systems ($5 billion is budgeted for technology). Another $25 billion in new funding will improve IRS operations.
The IRS will also be hiring 87,000 new agents to help enforce taxes. This means that the audit rates will increase, so if there are any discrepancies in your taxes, you may get a notice from the agency.
Small businesses and middle-class filers
The first piece of relatively good news for most of us is that the Inflation Reduction Act is not intended to raise taxes on small businesses or families earning less than $400,000 per year. However, whether or not this is the actual tax impact remains to be seen.
For the time being, the Inflation Reduction Act requires some corporations to pay more tax than they do now. For example, large businesses with more than $1 billion in reported income will pay a minimum corporate tax rate of 15% under the new law.
Tax Credits for Clean Energy for Homeowners
The Inflation Reduction Act has provided new tax credits to support clean energy. Other energy-related tax breaks have been extended, some of which may benefit homeowners.
For example, the law includes a 10-year extension of the homeowner credit for solar projects such as rooftop solar panels. Of course, the tax credit for solar panels can be beneficial on its own. However, it could positively impact people who want to use solar panels to charge their electric vehicles (EVs). Because if you qualify for both home and residential solar tax breaks, as well as the federal EV charger and equipment tax credit, you could benefit from two significant clean energy tax breaks in the new law.
People who buy energy-efficient water heaters, heat pumps, and HVAC systems may also benefit from the solar project tax credit.
Aside from solar incentives, affordable housing may increase due to the Inflation Reduction Act, which includes a $1 billion incentive program for energy-efficient affordable housing.
Tax breaks for purchasing electric vehicles
Electric vehicle tax credits are also included in the Inflation Reduction Act. The existing tax credit for purchasing a new or used EV is effectively extended for ten years until December 2032. The federal EV tax credit is available for any clean vehicle, which includes hydrogen fuel cell vehicles.
On the other hand, the Inflation Reduction Act places income limits on who can claim the EV tax credit and caps the manufacturers' retail sales price (MSRP) of cars that qualify for the EV tax credit. These restrictions effectively rule out higher-priced luxury EVs.
The Inflation Reduction Act also eliminates the 200,000-car limit for claiming the EV tax credit, potentially allowing manufacturers such as Tesla, General Motors, and Toyota to qualify.
In addition, beginning in 2024, car buyers will be able to use the EV tax credit as a discount when purchasing a vehicle. You could effectively transfer the credit to the dealer, who could then reduce the vehicle's price by the amount of the EV tax credit.
The Inflation Reduction Act also extends the federal EV charger tax credit for charging stations and equipment for EVs.
How can Taxfyle help?
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