Tax Implications of the Inflation Reduction Act

The Inflation Reduction Act (IRA), signed into law in 2022, directs federal resources toward climate change, healthcare costs, and the national deficit. The legislation uses the tax code to achieve its goals, creating incentives and new policies for both individuals and corporations. For individuals, the act provides financial incentives for clean energy and healthcare. For businesses, it combines green energy investment incentives with new tax obligations for large corporations.

Tax Credits for Individuals and Families

The Inflation Reduction Act introduced tax credits focused on energy and healthcare affordability for households. These provisions are designed to lower the cost of cleaner technologies and health insurance. The credits have specific eligibility requirements to ensure the benefits are targeted.

Clean Vehicle Credits

The IRA revised and expanded credits for electric vehicles (EVs). The New Clean Vehicle Credit provides up to $7,500 for a qualifying new vehicle. The Manufacturer’s Suggested Retail Price (MSRP) cannot exceed $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles. A taxpayer’s Modified Adjusted Gross Income (MAGI) cannot exceed $300,000 for joint filers, $225,000 for heads of household, or $150,000 for single filers.

The law also created the Used Clean Vehicle Credit, which is 30% of the sale price, up to a maximum of $4,000. The sale price of the used vehicle must be $25,000 or less, and its model year must be at least two years earlier than the calendar year of purchase. Income limitations for this credit are a MAGI of $150,000 for joint filers, $112,500 for heads of household, and $75,000 for single filers.

Both new and used vehicles must be purchased from a dealer. New vehicles also have sourcing requirements for battery components and critical minerals that can affect eligibility for the full credit. As of 2024, buyers can transfer the credit to a registered dealer at the point of sale, which lowers the vehicle’s purchase price immediately instead of waiting to claim the credit on a tax return.

Home Energy Credits

The IRA enhanced tax incentives for homeowners to invest in energy efficiency. The Energy Efficient Home Improvement Credit allows for an annual credit of 30% of the cost of qualifying improvements, with a general yearly cap of $1,200. This credit covers a broad range of upgrades, including:

• Insulation materials
• Energy-efficient windows and skylights (up to $600)
• Exterior doors (up to $250 per door, $500 total)
• Electrical panel upgrades (up to $600)

A separate annual limit of $2,000 applies to electric or natural gas heat pumps, heat pump water heaters, and biomass stoves. This credit is available for improvements to a taxpayer’s new or existing home, which does not have to be their main home.

For larger projects, the Residential Clean Energy Credit offers a 30% credit on the cost of new, qualifying clean energy property, including solar panels, solar water heaters, and battery storage technology. There is no overall dollar limit on this credit, and any excess that cannot be used in one year can be carried forward. The Residential Clean Energy Credit is available for the taxpayer’s primary residence.

Healthcare Premium Tax Credits

The IRA extended the enhanced Affordable Care Act (ACA) premium tax credits through 2025, lowering monthly premiums for plans on the Health Insurance Marketplace. The extension continues the policy that eliminates the upper income limit for eligibility, capping what a household pays for a benchmark plan at 8.5% of its income. This prevents a steep increase in premiums and makes subsidies accessible to a wider range of incomes. The credit amount is based on income and local health plan costs.

Tax Provisions for Businesses

The Inflation Reduction Act introduced tax changes for businesses, combining incentives for clean energy with new tax liabilities for the largest corporations. The impact of these changes varies depending on the size and industry of the business.

Business Energy Credits

For businesses, the IRA extends and expands the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). The ITC allows a business to deduct a percentage of the investment cost for a renewable energy system, while the PTC provides a per-kilowatt-hour credit for electricity generated by a qualifying source. The base credit is 6% but can increase to 30% if the business meets specific prevailing wage and apprenticeship requirements.

These credits are available for projects including solar, wind, and energy storage. The law also introduced the Commercial Clean Vehicle Credit for businesses purchasing electric vehicles. The credit is the lesser of 15% of the vehicle’s basis (30% if not powered by a gas engine) or the incremental cost compared to a comparable gasoline-powered vehicle.

Taxes on Large Corporations

A new Corporate Alternative Minimum Tax (AMT) establishes a 15% minimum tax on the “book income” of corporations that report an average annual adjusted financial statement income of over $1 billion for three consecutive years. This tax is designed to prevent large, profitable corporations from using deductions and other strategies to pay little to no federal income tax. This tax does not apply to S corporations or smaller businesses.

The act also implemented a 1% excise tax on the fair market value of stock repurchased by publicly traded corporations. This tax applies to the net value of a company’s stock buybacks, reduced by the value of any new stock issued during the year. The provision encourages companies to reinvest in their operations and workforce rather than buying back stock.

IRS Funding and Tax Enforcement

The Inflation Reduction Act provided significant additional funding to the Internal Revenue Service (IRS) over ten years to address budget declines and modernize the agency. While subsequent legislation has reduced the initial amount, the infusion of resources is directed toward several areas.

The funds are allocated across four main categories:

• Taxpayer services to improve phone support and online tools
• Business systems modernization to upgrade technology infrastructure
• Operations support for the day-to-day costs of running the agency
• Enforcement activities

The largest portion of the funding is for tax enforcement, intended to help the IRS close the “tax gap”—the difference between taxes owed and taxes paid. The Treasury Department has directed the IRS to use these resources to focus on complex tax evasion schemes used by large corporations and high-net-worth individuals. In response to public concern, the Treasury Secretary issued a directive that the funds should not be used to increase audit rates, relative to historical levels, for households earning less than $400,000 per year.

Claiming IRA Tax Credits

Once a taxpayer determines they are eligible for an IRA tax credit, they must claim it through the annual tax filing process. This requires specific forms and documentation to substantiate the purchase or improvement.

Required Forms

Each credit has a corresponding IRS form that must be filed with the taxpayer’s return. For the clean vehicle credits, taxpayers must file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit. For the home energy credits, Form 5695, Residential Energy Credits, is required and is divided into two parts for the two different home credits.

Information and Documentation

Before filling out the forms, taxpayers must gather specific documentation. For the Clean Vehicle Credit, the dealer provides a seller’s report at the time of sale containing the vehicle identification number (VIN), battery capacity, and other necessary details for Form 8936.

For home energy credits on Form 5695, detailed records of expenses are needed. Taxpayers should keep all invoices, receipts, and proof of payment for qualifying improvements. For larger projects like solar panel installation, the contract and final payment records are needed to document the total cost. The cost of a home energy audit may also be eligible for a credit of up to $150.

The Filing Process

The completed forms are submitted as part of the taxpayer’s annual Form 1040 filing. The total credit calculated on Form 5695 or Form 8936 is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. It is important to claim the credit in the correct tax year. For home improvements, the credit is claimed for the year the property was installed. For vehicles, the credit is claimed for the year the taxpayer takes possession of the vehicle.