Tax Changes for Individuals
The changes for individuals impact healthcare and green energy.
Premium tax credit.
Individuals who purchase their health coverage from the government marketplace may qualify for a premium tax credit. The credit may be accessed on an advanced basis by applying it toward the coverage premiums. Usually, the credit may be claimed only for those with household income not exceeding 400% of the federal poverty line (FPL) in the prior year. The new law waives the 400% FPL cap through 2025; those with higher household income may still claim the credit.
The amount of household income that individuals must apply toward health insurance premiums (“required contribution”) is limited in 2022 to a maximum of 8.5%, but it was supposed to rise to 9.12% of household income in 2023. The IRA retains the lower required contribution percentage through 2025.
Credits for green home improvements.
The non-business energy credit, which had expired at the end of 2021, has been extended through 2032, and the name of the credit has been changed to the energy efficient home improvement credit (IRC section 25C). The credit has been expanded in several ways:
- It may be claimed for any taxpayer home, such as vacation property; it is not limited to a principal residence.
- The amount of the credit has been raised to 30% of qualified expenditures (with a cap of $600 per item for most improvements); the former limit was 10%.
- The credit may be claimed each year; previously, there was a lifetime cap for the credit.
- The credit may be claimed for home energy audits up to $150.
- The credit no longer applies to roofs. Starting in 2025, a taxpayer must obtain a qualified product identification number assigned by the manufacturer.
The residential energy efficient property credit (IRC section 25D), now called the residential clean energy credit, applies to solar, electric, wind, and other alternative energy equipment installed on a taxpayer’s principal residence or other home. The credit rate, which had been set at 26% for 2022 and was set to decline in 2023 to 22%, has been increased to 30% through 2032. Starting in 2023, the credit may be claimed for qualifying battery storage technology with a capacity of at least 3 kilowatt hours.
The tax credit for plug-in electric powered vehicles, now called the clean vehicle credit, remains at the maximum credit of $7,500 and runs through 2032 (IRC section 30D). But the credit has been revamped in several ways:
- The 200,000-vehicle cap for manufacturers has been eliminated starting in 2023. This means that GMs, Teslas, and Toyotas that achieved this sales threshold may be creditable in 2023 (subject to the other rules below).
- There is a new “final assembly requirement,” effective for vehicles purchased after August 16, 2022. Final assembly must occur in North America. The Department of Energy published a list (https://bit.ly/3FuK9oD) of Model Year 2022 and early Model Year 2023 vehicles that meet this final assembly requirement. The IRS issued guidance (https://bit.ly/3WjOYao) on how the final assembly requirement applies to vehicles purchased in 2022.
- Starting in 2023, only vehicles with a purchase price of $80,000 or less for SUVs and vans, or $55,000 for other vehicles, may be considered qualified purchases.
- Starting in 2023, there is an income cap on purchasers: modified adjusted gross income (MAGI) of no more than $300,000 for married filing jointly and qualifying widows; $225,000 for heads of households; and $150,000 for all other filers.
Although the clean energy vehicle credit may be claimed in 2023 for the purchase of a used vehicle, there are several differences in the credit:
- The maximum credit for a pre-owned vehicle is the lesser of 30% of the purchase price, or $4,000.
- The credit may be claimed only once every three years.
- The vehicle’s sale price cannot exceed $25,000.
- MAGI limits apply for taxpayers claiming the credit for used vehicles—MAGI of no more than $150,000 for married filing jointly and qualifying widows; $112,500 for heads of households; and $75,000 for all other filers.
- The taxpayer must show a Vehicle Identification Number (VIN) that is at least two years earlier than the calendar year in which the vehicle was purchased.
- Starting in 2024, a taxpayer may transfer the credit to a dealer, effectively reducing the purchase price, instead of waiting to claim the credit when the return is filed.
Individuals may also be able to claim the alternative fuel refueling property credit for installing charging stations in their homes starting in 2023 (IRC section 30C). The credit amount is the lesser of 30% of the cost of the property, or $1,000. This credit runs through 2032.
Tax Changes for Businesses
Two of the big revenue raisers in the legislation (which pay for the tax breaks, healthcare, and deficit reduction) apply only to large corporations. Starting in 2023, there will be a 15% alternative minimum tax on a corporation’s book income [IRC section 55(b)]; this only applies to corporations with average annual income of $1 billion or more in the three prior years. More specifically, it applies to adjusted financial statement income (IRC section 55B). It is estimated that only about 200 corporations surpass this threshold.
Another measure impacting only publicly held corporations is a 1% excise tax on the repurchase of stock after December 31, 2022 (IRC section 4501). It does not apply to repurchases under $1 million.
Another revenue raiser is a two-year extension of the non-corporate taxpayer loss limitation through 2028 [IRC section 461(l)]. This provision limits the deduction for business losses by owners of pass-through entities.
Research credit as a payroll tax offset.
Small businesses with research and development expenses that qualify for the research credit may choose to use up to a set amount as an offset to their payroll taxes [IRC section 41(h)(4)(B)]. Currently, the limit is $250,000; it doubles to $500,000 in 2023.
Green energy provisions.
There are numerous tax changes to incentivize business investments in green energy.
The IRA adds nearly $80 billion in funding for the IRS. The money is intended for taxpayer services, enforcement, operations support, and business systems modernization. Treasury Secretary Janet Yellen stated in a letter (https://bit.ly/3NkKUCx) that this funding would not be used to “increase the share of small business or households below the $400,000 threshold that are audited,” but there is no way to enforce this promise.
The IRS did not include various longstanding tax proposals, such as curtailing or eliminating the cap on individuals deducting state and local taxes (SALT) paid. It did not extend favorable 2021 tax rules for the child tax credit, the dependent care credit, and the earned income tax credit. It did not change the rules on carried interest for certain investment fund managers. The question remains: Will there be additional legislation before the year is out?