President Biden recently signed a sweeping piece of legislation called the Inflation Reduction Act of 2022. It is designed to address climate change, energy, healthcare availability, and hopefully inflation. Below is a summary of how the new law could affect taxpayers.

Middle-Income Taxes

Lawmakers who backed the legislation were clear that the Inflation Reduction Act is not designed to increase taxes on families making $400,000 or less. However, some lawmakers are skeptical about whether the tax effect actually will play out that way. Tax experts have pointed out that some aspects of the legislation may have adverse downstream effects, imposing an indirect taxation on households below the $400,000 threshold. Furthermore, Congress shot down an amendment to prohibit the IRS from using new funds to audit families and businesses earning less than $400,000.

Health Care Tax Credits

The Affordable Care Act (ACA) program was due to expire at the end of 2022, but the Inflation Reduction Act extends the ACA program through 2025. Now eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to access lower health care premiums.

Additionally, the American Rescue Plan Act (ARPA) provided a temporary exception that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit (PTC). The Inflation Reduction Act extends this exception. The PTC assists qualified consumers in paying premiums for coverage purchased through the Health Insurance Marketplace. The PTC can be claimed on tax returns, or — for those who qualify for advance payments of the premium tax credit — you can choose to have amounts paid directly to the insurance provider.

Clean Energy Tax Credits for Homeowners

In an effort to support clean energy, the Inflation Reduction Act provides for both new and extended energy-related tax credits, some of which could benefit homeowners. This falls under the Energy Efficient Home Improvement Credit, which was renamed from the previous Nonbusiness Energy Property Credit. Beginning in 2023, the credit will be equal to 30 percent of the costs of all eligible home improvements completed during the year. One example is a 10-year extension of the homeowner credit for solar projects such as rooftop solar panels. This same credit could be applied to energy-efficient water heaters, heat pumps, and HVAC systems. There are also credits for exterior doors, windows, and skylights that meet Energy Star most efficient certification requirements.

Electric Vehicle Tax Credits

The Inflation Reduction Act also includes arrangements for electric vehicle (EV) tax credits. Basically, the law extends the up-to-$7,500 existing EV tax credit for 10 years — until December 2032. Additionally, used EVs that are at least two years old will have a separate tax credit of either up to $4,000 or 30% of the price of the vehicle, whichever is less.

The law also imposes income limits on who can claim the credit. For single or married filing separately taxpayers, the adjusted gross income (AGI) limit is $150,000; for taxpayers filing as head of household, the limit is $225,000; and for married filing jointly, or surviving spouse taxpayers, the limit is $300,000. These limits are reduced for the used vehicle credit.

IRS Funding

Finally, the Inflation Reduction Act provides about $80 billion of additional funding over ten years for the IRS. The specific plans for those funds aren’t known yet, but $25 billion is expected to go toward improving IRS operations. Furthermore, law makers foresee $45 billion of the funds used to improve tax enforcement. This could include expanding staff and modernizing outdated processing systems.