Will the Inflation Reduction Act of 2022 live up to its name in 2023? Whether the legislation tames inflation or not, will the Inflation Reduction Act tax provisions save taxpayers money?
If you're an employer, a homeowner, manage a non-profit, fund research, own commercial property, or want to help the environment, the act, also known as the "climate bill," includes tax credits and conveniences you'll want to know. And if it reduces inflation, everyone benefits.
Before diving into the act itself, it's important to understand the difference between a tax deduction and a tax credit.
Tax deduction vs. tax credit: What's the difference?
Although both terms sound similar, from a financial and tax point of view, a tax deduction and a tax credit are very different. (Spoiler alert: a tax credit is generally more desirable.)
You may recall that individuals and couples pay taxes based on their adjusted gross incomes. Many of those "adjustments" are deductions.
For example, let's say you have medical expenses of $10,000 that insurance will not cover. Because of your specific tax situation, that $10,000 is tax deductible, meaning you can subtract it from your gross income. So, if your gross annual income is $100,000, your adjusted gross income will be $90,000 after deducting your medical expenses. Instead of paying taxes on $100,000, you will only pay taxes on $90,000. If your marginal tax rate (federal and state) is 30%, your $10,000 tax deduction will cut your taxes by $3,000.
On the other hand, a tax credit of $10,000 would cut your taxes by $10,000. (Keep in mind that these are just examples.)
The Inflation Reduction Act includes tax deductions and rebates for individuals and businesses. Some apply to only a small group, but others could make a financial difference for many people. Here are some of the highlights.
Encouraging environmentalism
Much of the Inflation Reduction Act tax credits—and, in some cases, rebates—are designed to help consumers and businesses become more energy efficient. They include:
- Rebates and/or tax credits for homeowners who make their homes more energy efficient, including:
- Rooftop solar and electric vehicles
- Clothes dryers, stoves, and ovens
- Heat pumps for heating, cooling, and hot water
- Electric panels and wiring
- Tax credits for energy audits, weatherization, insulation, and energy-efficient doors and windows
- Fuel credits for businesses that switch to certain sustainable or cleaner fuels
- Credits for businesses that purchase certain environmentally-friendly vehicles or employ certain cleaner manufacturing processes
Note that some of these credits and rebates may not take effect until individual states complete their parts of the process. Some of the tax credits are new, while others are extended credits that were due to expire.
Reducing healthcare costs
For individuals and families that rely on the Affordable Care Act (aka Obamacare), subsidies that were set to expire in 2022 have been extended. These apply to individuals and families whose incomes are less than 400% of the federal poverty level. The amount is dependent upon family size.
Many Medicare beneficiaries could see their prescription drug costs go down because Medicare is now allowed to negotiate prescription drug costs. Americans with Medicare Part D will see their annual out-of-pocket drug costs capped at $2,000, and Medicare beneficiaries with diabetes will have their insulin costs capped at $35 for a month's supply.
There are many other changes in the act, including numerous incentives for corporations. There are also new tax laws aimed at corporations, designed to increase tax revenue and close certain loopholes.
Final word
While it's too soon to know whether the act will achieve its dual aims of reducing inflation and trimming the federal deficit, taxpayers should consult a financial planning or tax professional to better understand how specific provisions of the act will affect them.
