Inflation Reduction Act of 2022 – Part 2
Inflation Reduction Act of 2022 – Part 2
The primary stated purposes of the recently-passed Inflation Reduction Act of 2022 is to reduce inflation and ward off an economic recession. The legislation spans 273 pages and dozens of subjects from tax policy to environmental regulations to extensions of the Affordable Care Act to prescription drug reform. This article covers some of the most significant tax-related provisions for individuals including: 1) Energy Efficient Home Improvement Credits; 2) Residential Clean Energy Credits; and 3) Clean Vehicle Credits.
Energy Efficient Home Improvement Credit
The Nonbusiness Energy Property Credit, which was previously scheduled to expire in 2024, was extended through 2032 and renamed the Energy Efficient Home Improvement Credit. In 2023 the non-refundable credit will be equal to 30 percent of the costs of all eligible home improvements made during the year. Additional requirements and opportunities include:
- The $500 lifetime limit on the total credit amount will be convert to a $1,200 annual limit.
- The annual limits for specific types of qualifying improvements will be:
- $150 for home energy audits;
- $250 for any exterior door ($500 total for all exterior doors) meeting applicable Energy Star requirements;
- $600 for exterior windows and skylights meeting Energy Star most-efficient certification requirements;
- $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; and water boilers;
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This category of improvement is not limited by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
- Roofing will no longer qualify.
Home improvements using products placed in service after 2024 will only be allowed if the manufacturer of the purchased item creates a product identification number for the product and the taxpayer claiming the credit includes the number on his or her return for that tax year.
Prior credit rules apply for 2022.
Residential Clean Energy Credit
The Residential Energy Efficient Property Credit, which was also previously set to expire in 2024, is now called the Residential Clean Energy Credit and has been extended through 2034. The Inflation Reduction Act increased the credit amount with a phaseout of the applicable percentage over time. The amounts of the credit are:
- 30 percent for 2023-2032;
- 26 percent for 2033; and
- 22 percent for 2034.
The credit no longer applies to biomass furnaces and water heaters, which are now covered under the Energy Efficient Home Improvement Credit. The new credit for 2023 will apply to battery storage technology with a capacity of at least three kilowatt hours.
Clean Vehicle Credits
The Inflation Reduction Act extends the Clean Vehicle Credit, which was also previously set to expire in 2024, until the end of 2032 and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles.
Nonrefundable tax credits include up to the following –
- $7,500 for the purchase of new qualified commercial clean vehicles;
- $40,000 for vehicles over 14,000 pounds; and
- the lesser of 30 percent of the price of used electric vehicles or $4,000.
Limitations are based on the manufacturer’s suggested retail price of the vehicle.
The Clean Vehicle Credit is based on modified adjusted gross income (MAGI) thresholds. No credit is allowed for any tax year if the lesser of the taxpayer’s MAGI for the current or preceding tax year exceeds the threshold amount (with no phaseout):
- For single or married filing separately taxpayers, the 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.
Reduced AGI limitations apply to the used vehicle credit.
In 2024 the Inflation Reduction Act establishes a mechanism allowing car buyers to transfer the credit to dealers at the point of sale so the credit can directly reduce the purchase price.