6 planned IRS changes that could impact your finances

2023-01-16

President Biden signed the Inflation Reduction Act into law last August. At $750 billion, it is one of the largest spending packages in American history. Much of the funds will be used to combat climate change, reduce prescription and healthcare costs — and enact tax reform. But when? And how does any of this affect taxpayers?

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Here’s a look at some of the key changes of the Inflation Reduction Act that are being implemented over the next five years — and what they may mean for your wallet — as broken down by CPAs and other finance experts.

Health Insurance Costs

“Of interest to people who buy their health insurance on an exchange under the Affordable Care Act is that the Inflation Reduction Act increased the premium tax credit available to people enrolled in a qualified health plan,” said Bruce A. Tannahill, director of estate and business planning with MassMutual.

This change takes effect in 2023.

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Prescription Drug Costs

“With the recent rise in inflation, retirees are confronted with balancing rising costs while living on fixed income,” said Brian Mawhinney, CFP, head of financial planning with MassMutual. “To help prevent seniors from forgoing essential services like healthcare, the Inflation Reduction Act attempts to address increasing healthcare costs through tackling rising prescription drug expenses.

“The act allows Medicare to negotiate directly with pharmaceutical companies. For example, about one-quarter of Medicare recipients are dependent on life-saving insulin. As a result of the IRA, these costs will now be capped at $35 per month. Medicare beneficiaries also will receive greater financial protection with a $2,000 cap on annual out-of-pocket expenses for prescription drugs, saving many seniors up to $1,000 annually.”

This first part of this change — the negotiations on the insulin cap — takes effect in 2023. The Medicare cap of $2,000 for prescriptions occurs in 2025.

Credit for Energy-Efficient Home Improvement

“The Nonbusiness Energy Property Credit was renamed the Energy-Efficient Home Improvement Credit and extended through 2032,” said Levon L. Galstyan, CPA at Oak View Law Group. “The credit will equal 30% of the expenses of all permissible home improvements performed during the year, beginning in 2023.”

Also:

A $1,200 yearly restriction will take the place of the $500 lifetime cap on the total credit amount.
The yearly limits for qualifying improvements: $150 for home energy audits, $250 for any exterior door (a total of $500 for all exterior doors that comply with Energy Star requirements), $600 for exterior windows and skylights that comply with Energy Star’s most efficient certification requirements, and $600 for other qualified energy property (central air conditioners, electric panels, related equipment, natural gas, propane or oil). The $600 cap on qualified energy property and the $1,200 yearly cap on total credits do not apply to this kind of improvement, and roofing is no longer eligible.
No credit will be granted for qualified home improvements made with products that enter service after 2024 unless the seller of each purchased item generates a product identification number for it and the taxpayer requesting the credit includes the number on that year’s tax return.
Note that for 2022, the previous credit policies are in effect.

Credit for Clean Residential Energy

“The Residential Clean Energy Credit … was set to end at the end of 2023 but has now been extended to 2034,” Galstyan said. “The Inflation Reduction Act also raised the credit amount, with the corresponding percentage phased out.”

The credit is 30% for 2023-2032, 26% for 2033 and 22% for 2034, Galstyan said.

“Biomass furnaces and water heaters are no longer eligible for credit,” he said. “They are now covered under the Energy Efficient Home Improvement Credit. But starting in 2023, the new credit will be available for battery storage systems with a minimum 3-kilowatt-hour capacity.”

Credits for Clean Vehicles

“The Inflation Reduction Act adds new credits for qualifying clean commercial and previously owned clean vehicles, extending the Clean Vehicle Credit through the end of 2032,” Galstyan said.

Tax credits consist of the following:

$40,000 for vehicles above 14,000 pounds, $7,500 for new qualifying commercial clean cars, and the lesser of $4,000 or 30% of the cost of secondhand electric vehicles. Based on the vehicle’s manufacturer-suggested retail price, restrictions apply.
Additionally, the new vehicle credit thresholds must be met based on adjusted gross income (AGI). For taxpayers who are single or married and filing separately, the limit is $150,000; for heads of household, the limit is $225,000; for those filing jointly or a surviving spouse, the limit is $300,000.
The used car credit has lower AGI restrictions. Galstyan said, “The Inflation Reduction Act creates a mechanism that will enable automobile customers to transfer the credit to dealers at the point of sale so that it can immediately lower the purchase price, starting in 2024.”

The IRS and Taxes

The Inflation Reduction Act contains a 1% excise tax on corporate share buybacks, a 15% minimum tax on businesses with annual incomes of $1 billion or more, and an extra $79 billion over 10 years for the IRS, Galstyan said.

“The IRS is putting together a strategy outlining how it intends to use the extra money,” he said. “These resources are not about boosting audit scrutiny on small businesses or middle-income Americans. To better serve all taxpayers, especially small enterprises and middle-class taxpayers, additional resources will be allocated to hiring personnel and developing IT systems.”

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This article originally appeared on GOBankingRates.com: 6 IRS Changes Coming in the Next 5 Years That Could Impact Your Finances

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