INFLATION REDUCTION ACT (IRA)
On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) of 2022 into law, representing the largest investment in addressing climate change in US history. The new law aims to control inflation by reducing the deficit, investing in domestic energy production, and promoting clean energy.
The legislation includes provisions for prescription drug reform and tax reform and authorizes $391 billion in spending on energy and climate change, $238 billion in deficit reduction.
The IRA prioritizes driving down consumer energy costs, increasing energy security, and reducing greenhouse gas emissions. Its primary allocation areas are renewable energy and grid energy storage, nuclear power, electric vehicle incentives, home energy efficiency upgrades, home energy supply improvements, and advanced manufacturing.
The law focuses on improving home energy efficiency and extending tax credits for electric vehicles to decrease residential energy costs. The legislation also includes tax reforms that increase personal tax payments for Americans of all income levels.
According to the Joint Committee on Taxation (JCT), taxpayers earning less than $200,000 a year will see an increase of $16.7 billion, those earning between $200,000 and $500,000 will see an increase of $14.1 billion, and those earning over $500,000 will see an increase of $23.5 billion. The Tax Policy Center estimated that the bottom 80% of tax filers by income would receive a net benefit, while the 80th-99th percentile would incur a small cost (0-0.1% increase in average federal tax rate) and the top 1% would incur a 0.2% increase.
To combat tax evasion, Treasury Secretary Janet Yellen directed the IRS Commissioner to focus on "high-end noncompliance" and not use the new funding allocated in the bill to increase audits of those making less than $400,000 a year.
The IRA also includes tax credits for electric vehicle owners worth between $3,500 and $7,500. The Department of Energy and the Department of Transportation have published resources identifying vehicles that will likely meet all requirements for tax credit. The US Treasury Department has also stated that owners who purchase eligible vehicles previous to August 16, 2022, but did not possess the vehicle until after that date also qualify for the Clean Vehicle Credit.
However, most currently available EVs on the market will not qualify for the tax credits due to requirements that qualified EVs must have "at least 40 percent of materials sourced from North America or a US trading partner by 2024" and that their batteries cannot contain minerals that "were extracted, processed, or recycled by a foreign entity of concern.
" The Inflation Reduction Act of 2022 is a significant step forward in addressing climate change, reducing the deficit, and promoting clean energy. By investing in clean energy and promoting energy efficiency, the IRA will help reduce greenhouse gas emissions, increase energy security, and drive down consumer energy costs. It includes provisions to benefit low- and middle-income taxpayers, extend premium tax credits for health plans, provide tax credits for making homes more energy-efficient, and lower the price of prescription drugs.
The IRA represents a significant expansion and modernization effort for the IRS, and it is projected to reduce 2030 US greenhouse gas emissions to 40% below 2005 levels.
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