Jay and I have reviewed the Inflation Reduction Act. So, how might the Inflation Reduction Act affect you? Most likely, not much.
There have been some scary headlines about thousands of new IRS agents being hired. I am not a fan of the IRS, but I am a fan of my kids, Finn (14 years old) and Ella (7 years old). I don’t want them paying extra taxes because others cheated. I suspect you don’t want your loved ones paying more because others cheated. The new agents should catch some tax cheats and cause others to not cheat. Our advice remains unchanged: Don’t do anything you wouldn’t want the IRS to ask you about. (Besides, I wouldn’t look good in an orange prison jumpsuit either.)
The Act also appropriates money to increase call center service levels and update computer systems. Fun Fact: the IRS is still running computers on Cobol, a computer programming language created in 1959. Just how much 1959 era technology are you using? Me neither.
Let’s look at the things that might more directly impact you.
Medicare
Under the Act, Medicare can negotiate prescription drug prices on some drugs, so Medicare recipients will get free vaccines, a $35/month cap on insulin starting 2023, and caps out-of-pocket drug costs for Medicare Part D members at $2,000/year in 2025.
Energy Efficiency
The legislation also includes energy efficiency incentives through federal tax credits (the so-called 25C tax credit). You can enjoy a tax credit equal to the lesser of $1,200 or 30% of the cost of the installation of things like solar panels, wind turbines, or geothermal systems. There are sub limits for other items: $600 for some air conditioners, water heaters or boilers; $600 for windows and skylights; $250 for an exterior door; $500 for multiple exterior doors; and $2,000 for heat pumps and biomass stoves (whatever those are).
The tax credit goes into effect on January 1, 2023, and runs through the end of 2032. Because of the relatively low cap, you could spread out projects over multiple tax years – insulation one year, windows the next, and doors the third. A tax credit, unlike a tax deduction, reduces your taxes dollar-for-dollar. If you were going to remodel anyway, the tax credits are a nice little extra, but not enough to get me to undertake a project I wasn’t going to start anyway. Remind your tax preparer to file IRS Form 5695 to receive the credit.
Last, there is up to a $7,500 tax credit for purchasing certain types of electric vehicles (EVs). To qualify the cars must be manufactured in the US by a company that has sold less than 200,000 EVs. There are battery mineral source and manufacturing requirements starting in 2023 to qualify for the credit.
