The Inflation Reduction Act, which includes expanded or extended tax credits and additional funding for the IRS, was signed into law on August 16, 2022.
How could the Inflation Reduction Act impact you when filing your next tax return?
Below is a simplified summary of how the Inflation Reduction Act may affect you.
The Inflation Reduction Act includes:
Energy Efficient Home Improvement Credit
The Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit.
Starting in 2023, the credit will be equal to 30 percent of the costs of all eligible home improvements made during the year. Additionally:
For eligible home improvements using products placed in service after 2024, no credit will be allowed unless the manufacturer of any 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.
Note: For 2022, the prior credit rules apply.
Residential Clean Energy Credit
The Residential Energy Efficient Property Credit, now called the Residential Clean Energy Credit, was previously scheduled to expire at the end of 2023 but has been extended through 2034. The Inflation Reduction Act also increased the credit amount, with a phaseout of the applicable percentage.
Amount of Credit:
The credit no longer applies to biomass furnaces and water heaters, now covered under the Energy Efficient Home Improvement Credit. Starting in 2023, however, the new credit 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 until the end of 2032 and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles.
Tax credits include up to:
Limitations apply based on the manufacturer’s suggested retail price of the vehicle. There are also limitations for the new vehicle credit based on adjusted gross income (AGI) thresholds – 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.
Starting in 2024, the Inflation Reduction Act establishes a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price.
Taxes and IRS Funding
The Inflation Reduction Act also includes:
The IRS is preparing a plan showing how it expects to use the additional funding. In a recent letter to all Members of the Senate, IRS Commissioner Charles Rettig stated, “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans…Other resources will be invested in employees and IT systems that will allow us to better serve all taxpayers, including small businesses and middle-income taxpayers.”
The Inflation Reduction Act makes these and several additional changes to the Internal Revenue Code. While these changes may not impact your individual tax bill, the extended tax credits may save you money at tax time.
For more information about the Inflation Reduction Act, see the IRS Newsroom.
The Taxpayer Advocate Service will post information as it becomes available on our News and Information page for applicable tax-related topics relating to the Information Reduction Act.