Article Highlights: Increased Internal Revenue Service (IRS) Funding Drug Pricing Affordable Care Act Insurance Premiums Corporate Minimum Tax Excise Tax on Corporate Stock Buybacks Home Solar Energy Credit Extended and Increased Credit For Energy Efficient Home Modifications Clean Vehicle Credit Credit For Previously Owned Clean Vehicles Credit For Qualified Commercial Clean Vehicles Research Credit On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 which is a scaled-back version of the prior Biden administration proposals originally included in the Build Back Better Act. The legislation includes a variety of provisions, including substantial green energy incentives, reduction of Affordable Care Act insurance premiums, IRS funding, corporate minimum tax, and more. This article will explore how these provisions will impact individual taxpayers. Increased Internal Revenue Service (IRS) Funding – The IRS has been underfunded for years resulting in inadequate customer service causing extensive waits to speak with an agent to solve issues with the IRS, and substantially reduced enforcement activities. Although some of the $79.6 billion supplemental appropriations will go towards improving customer service, the bulk of the appropriation will go towards increased enforcement, according to the Congressional Research Service. However, Treasury Secretary Janet Yellen has indicated the additional funds will not be used to increase audits of people making less than $400,000 above historic levels. Drug Pricing - The legislation permits Medicare to negotiate lower drug prices (up to 10 drugs in 2026, another 15 in 2027 and 2028, and another 20 annually starting in 2029) and puts a cap on annual out-of-pocket costs at $2,000. Affordable Care Act Insurance Premiums – The previously enacted American Rescue Plan temporally included enhanced subsidies for people buying their own health coverage on the Affordable Care Act Marketplaces for the years 2021 and 2022. The Inflation Reduction Act has extended those subsidies for three years, through 2025. These enhanced subsidies increase the amount of financial help for low and middle-income individuals, many of whom were previously priced out of health insurance coverage. Corporate Minimum Tax – As a fundraiser to help pay for the other provisions, the legislation includes a new corporate minimum tax of 15% that would be imposed on corporations with an average book income of over $1 billion. This provision is projected to raise $258 billion over 10 years. Excise Tax on Corporate Stock Buybacks – Stock Buybacks are when a company purchases its own shares, resulting in fewer outstanding shares. This tends to benefit corporate executives rather than raising worker wages, research and development, and other productivity-boosting investments. The legislation imposes a 1% tax on stock buybacks. This provision is projected to raise $74 billion over 10 years. Home Solar Energy Credit Extended and Increased – Before the passage of the Inflation Reduction Act, a resident of a home was entitled to a non-refundable tax credit for the use of solar electric panels, solar hot water, fuel cells, small wind energy, geothermal heat pumps, and biomass fuel property they had installed for the residence. However, that credit was in the process of being phased out by slowly reducing the credit percentage from 30% to 22%, and the credit was scheduled to end after 2023. With this law change, the credit retroactively returns to 30% for the years 2022 through 2032 when it again begins to phase out and ends after 2034. This means those who qualify for the credit in 2022 benefit from a 30% credit rather than the expected 26% under prior law. Credit For Energy Efficient Home Modifications – This provision provides a non-refundable tax credit for certain energy-saving improvements to a taxpayer’s home. The credit previously expired at the end of 2021, but under the Inflation Reduction Act has been extended and modified through 2032. The previous lifetime credit limit of $500 has been replaced with an annual maximum credit of $1,200, and the credit percentage increased from 10% to 30%. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements: $600 for credits with respect to residential energy property expenditures, windows, and skylights. $250 for any exterior door ($500 total for all exterior doors). $300 for residential qualified energy property expenses Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers. The $1,200 credit amount increased by up to $150 for a home energy audit. A home energy audit is an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer's principal residence, which identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit. The new law eliminates treatment of roofs as creditable after 2022 The new law adds Air sealing insulation as a creditable expense. Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner. Clean Vehicle Credit – After 2022 and through 2032, this credit replaces the current plug-in electric vehicle credit and makes significant changes. Transition Rule: A taxpayer who, after December 31, 2021, and before August 16, 2022, purchased, or entered a written binding contract to purchase, a new electric vehicle and placed that vehicle in service on or after the date of enactment, may elect to treat the vehicle as being placed in service before the date of enactment of the Act. This transition rule allows a taxpayer to apply the prior law to the vehicle. This allows a taxpayer to avoid the modified AGI (income), vehicle price, and other restrictions under the new law. Credit Amount – Is based upon two amounts (certified by the qualified manufacturer): Critical Minerals – This portion of the credit is $3,750 and is based upon the percentage of the value of the applicable critical minerals contained in the battery that were: (i) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or (ii) Recycled in North America Is equal to or greater than the applicable percentage (see applicable percentage below). Battery Component Requirement - This portion of the credit is $3,750 based upon the percentage of the value of the components contained in the battery that is used in the vehicle that were manufactured or assembled in North America is equal to or greater than the applicable percentage (see applicable percentage below). Applicable Percentage – The applicable percentages for each year are included in the following table: APPLICABLE PERCENTAGES Year 2023 2024-2025 2026 2027 2028 Later Years Percentage 50 60 70 80 90 100 Final Assembly Requirement - The Act also requires that final assembly of the vehicle occurs in North America. "Final assembly" means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether the component parts are permanently installed in or on the vehicle. The final assembly requirement applies to vehicles sold after the date of enactment, August 16, 2022. Not all Vehicles Will Continue to Qualify – Because of the critical mineral, battery, and final assembly requirements, only some of the currently available vehicles will continue to qualify for the new credit.