Understanding The Changes To The Tax Code Under The Inflation Reduction Act
The Inflation Reduction Act, one of the Biden Administration’s major pieces of legislation, received Congressional approval in August and was recently signed into law. Among the provisions of the Inflation Reduction Act are numerous significant changes to the tax code that could affect your liability come filing season.
It’s always important to be prepared for potential changes that could affect your tax liability. That’s why we’ve provided a summary of the tax provisions and expirations in the Inflation Reduction Act. If you want to learn more about how these changes could affect your filing, don’t hesitate to schedule a financial review with your Boxelder accountant today!
Energy Tax Credits Extended
Clean energy tax credits for homeowners
As part of the Inflation Reduction Act, clean energy tax credits are extended to 2032. Eligible homeowners could qualify for a 30% tax credit, but after 2032, a 26% tax credit would apply until 2034. Tax incentives are also included for the purchase of energy-efficient water heaters, heat pumps, and HVAC systems. Rebates for these items can add up to as much as $14,000 and take effect immediately.
Rebates for electric vehicle (EV) purchases
Existing tax credits for the purchase of a new electric vehicle are extended through December 2032. To qualify, “clean” vehicles must be assembled in North America and priced under $80,000 for trucks and SUVs, and under $55,000 for all other types of cars.
Qualified buyers of new vehicles will receive a $7,500 credit, applied at the point of sale. A new $4,000 tax credit would also apply for the purchase of qualified used electric vehicles. The credit is available to married couples filing a joint return with income less than $300,000 per year and single tax filers with income under $150,000.
American Care Act Subsidies Extended
Subsidies for health insurance under the Affordable Care Act (ACA) were expanded in the wake of COVID-19 but scheduled to expire at the end of 2022. The Inflation Reduction Act extends those subsidies through 2025.
Reduced Prescription Drug Prices And Free Vaccinations For Seniors
The Inflation Reduction Act opens the door for Medicare to negotiate prescription drug prices. Beginning in 2023, this will involve only 10 particular drugs, but the list will eventually be expanded to 20 to hopefully lower the cost of medications for Medicare beneficiaries.
Another provision caps Medicare beneficiaries’ drug costs to $2,000 per year beginning in 2025, with some reduced costs taking effect in 2024. Drug manufacturers will be required to pay a rebate if they increase prices faster than Medicare’s rate of inflation, a law that takes effect in 2023.
Additionally, the Inflation Reduction Act provides seniors with free vaccinations beginning in 2023.
New C-Corp Minimum Tax
Under current law, most U.S. corporations that earn more than $1 billion in profits are subject to a 21% corporate tax rate — but many use loopholes to pay less or no federal tax.
Under the new code, a minimum tax of 15 percent will apply based on annual income posted in a corporation’s financial statement — rather than the corporation’s taxable income — effective on January 1, 2023. Corporations will still have the ability to claim certain credits to reduce their tax liability.
Private equity firms that own various subsidiaries with profits totaling more than $1 billion are exempt from the 15% minimum tax.
Expiring Tax Laws Not Renewed by the Inflation Reduction Act
Many of the provisions included in Trump’s 2017 tax code, the Tax Cut and Jobs Act (TCJA), are scheduled to expire by Dec. 31, 2025. With that date drawing nearer and with the Biden admin signaling no new proposals, planning ahead for these sunsetting provisions is critical for understanding your evolving tax liability.
Key provisions affecting individual taxpayers that are scheduled to expire or change at the end of 2025 include:
Tax Bracket Rates
The top tax bracket that affects individual taxpayers, estates, and trust income is scheduled to revert to 39.6% (from the current 37%) at the end of 2025. The 12%, 22% and 24% individual income tax rates will also move higher.
That being said, the IRS recently announced their annual inflation adjustments to the federal tax brackets and standard deduction for 2023. Learn more about your 2023 tax brackets here.
Unified Estate And Gift Tax Deduction
The unified estate and gift tax deduction sets a total dollar amount that an individual can gift during their lifetime and pass on to heirs before any gift or estate taxes apply. Valued at $12.06 million per individual in 2022 (effectively $24 million for a married couple) this tax credit is expected to be cut approximately in half after 2025.
Thus, the ability to utilize certain lifetime gifting and wealth transfer strategies will be limited beginning on Jan. 1, 2026, if not earlier.
Get Ahead – Schedule A Financial Review With A Boxelder Accountant Today!
It’s always important to be prepared for potential changes that could affect your tax liability, and the best way to do that is to plan ahead. If you want to learn more about how these inflation tax adjustments could affect your tax liability and begin planning for next spring’s tax season, reach out to our award-winning team of expert accountants to schedule your financial review.