How Will Your Taxes Change Under The Inflation Reduction Act?
September 2022 ISSUE August 19, 2022 Updated August 31, 2022Tax Individual
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Recently, President Biden signed the Inflation Reduction Act (IRA), formerly known as the Build Back Better Act (BBBA), into law. The new law raises roughly $739 billion by imposing a 15% minimum tax on large corporations and a 1% excise tax on stock buybacks, increasing IRS tax enforcement, and realizing savings from allowing Medicare to negotiate some prescription drug prices.
From this projected revenue, $369 billion will be spent on climate and energy programs, including numerous tax credits as detailed below. Another $64 billion will be used to extend health care subsidies for some Affordable Care Act users for the next 3 years, as described in our article "New Options To Provide Tax-Favored Staff Health Benefits." The remainder of the revenue generated was designated to reduce the federal budget deficit.
Increased IRS Funding To Ramp Up Audits
The bill includes $80 billion in new funding for the IRS over the next 9 years, which is projected to raise more than $180 billion in revenue (down from the original estimate of over $200 billion). That’s a huge increase in IRS funding, more than six times its current annual budget of $12.6 billion.
Of the $80 billion, almost $46 billion is allocated for increased enforcement, targeting high-income individuals, partnerships and S corporations, and larger corporations. This will drastically increase funding for litigation, criminal investigations, investigative technology, digital asset monitoring, and a new fleet of tax collector automobiles. This makes it clear that Congress wants the IRS to bring the hammer down on taxpayers through dramatically increasing audits, civil lawsuits, and criminal tax referrals. Last year, we warned doctors this was coming and offered our recommended audit-proofing strategies. See “10 Steps To Protect Against The Coming IRS Audit Avalanche,” June 2021.
The Joint Committee on Taxation estimates that 78-90% of the money raised from underreported income will come from those making less than $200,000, while only 49% will come from those making more than $500,000. A huge audit target will likely be Pass-Through-Entities, such as Subchapter S corporations and partnerships, where business profits are taxed on your individual tax return.
Meanwhile, only $3.2 billion is allocated for improving taxpayer services, which is at its lowest level in decades. During the 2022 filing season, the IRS answered only 10% of its phone calls. Moreover, as of May 31, 2022, the IRS is still sitting on 21.3 million unprocessed paper tax returns and millions of taxpayers are waiting 6 months or more to receive refunds. So, when it comes time to file your return, make sure you owe them (IRS), rather than them owing you!
Increased Energy Related Tax Credits
The new law sets aside $360 billion to combat climate change through a series of tax credits, the most important of which are as follows:
- A refundable tax credit for the purchase of a new qualifying electric vehicle (EV), discussed in detail in our article “How To Qualify For The Maximum Electric Vehicle Tax Credit.”
- Beginning in 2023, a refundable credit of 30% of the sales price, up to a maximum of $4,000, is available for buying a used EV that is more than 2 years old with a sales price of $25,000 or less. The used EV credit is available only to those with an Adjusted Gross Income (AGI) of up to $150,000 (married) or $75,000 (single).
- The credit for energy-efficient home improvements is increased up to 30% of the cost, with a maximum credit of $1,200 annually for most items (new windows, doors, etc.), beginning in 2023. The annual limit increases to $2,000 for installation of an electric or natural gas heat pump, biomass stove, or hot water heater.
- Alternative energy credits, including solar, wind, geothermal, or fuel cell technology, are increased back up to 30% of the original cost beginning in 2023. An additional 10% tax credit is available if the alternate energy equipment is manufactured in the U.S., and another 10% is available if the equipment is installed in certain communities including those historically producing coal, or those having significant employment from coal or natural gas industries, for a maximum tax credit of 50% of the cost.
- Rebates for home electrification include up to $8,000 for a heat pump HVAC system, $1,750 for converting to a heat pump water heater, $840 for induction stoves and electric appliances, up to a $4,000 rebate to upgrade your home’s electrical system so that solar and battery storage systems can be installed, up to a $1,600 rebate to insulate and seal your home, and up to a $2,500 rebate to repair wiring. These rebates are available up to a maximum of $14,000 per household as part of the High-Efficiency Electric Home Rebate Program (HEEHRP) and will be administered by each state. To qualify, your household income must not exceed 150% of the area median income as calculated by HUD.
- Startup practices (in business for 5 years or less with collections of less than $5 million), can elect to use up to $500,000 of research and development (R&D) tax credits against their payroll taxes, instead of their income taxes, beginning in 2023, up from $250,000 now.
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The McGill Advisory content Is provided For informational purposes only And does Not constitute legal, accounting, Or other professional advice.
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