The Inflation Reduction Act and Taxes: What You Should Know

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The Inflation Reduction Act and Taxes: What You Should Know

Senate Democrats have proposed the Inflation Reduction Act of 2022—a climate, energy, healthcare, and tax bill that if passed, would increase IRS funding, and change some tax policy and tax credits.

by: Kelley R. Taylor

August 3, 2022

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You’re probably not thinking much about taxes right now, in part because record inflation has you paying sky-high prices for essentials like food, clothing, and gas. But recently, Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Joe Manchin (D-W.Va.) proposed the Inflation Reduction Act of 2022, which is a sweeping piece of legislation designed to address some of the significant issues that the U.S. is facing.

Some of those issues include the high cost of prescription drugs, healthcare availability, climate change, and, yes, hopefully inflation. Proponents of the bill say that its various provisions for fighting climate change, supporting clean energy production, and raising tax revenue, will reduce the deficit and in turn, combat inflation. And if the bill becomes law, some of the expanded tax credits in it could benefit you.

It’s important to note, however, that the Inflation Reduction Act has a way to go before it becomes law—it must get all 50 Democratic votes in the 50-50 U.S. Senate and Vice President Kamala Harris would have to place the tie-breaking vote. Also, right now, it is unclear if Sen. Kyrsten Sinema (D-Ariz.) supports the legislation. And the bill also must pass in the House of Representatives, where the vote margin is also quite slim. (Some Democratic lawmakers in the House may be disappointed that the massive bill doesn’t make any changes to the popular state and local tax (SALT) deduction, which is currently capped at $10,000 per year).

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Still, if the legislation does pass soon, it’s good to have information about how the Inflation Reduction Act might impact your taxes.

Small Business and Middle-Class Income Taxes

The first piece of relatively good news for most of us is that if the Inflation Reeducation Act becomes law, it is not designed to increase taxes on small businesses or on families that make $400,000 or less. However, whether that would be the actual tax effect if or when the bill becomes law remains to be seen. But for now, lawmakers who back the legislation say that it will not raise taxes on small business or middle-income families.

Instead, the bill would have some corporations and hedge fund managers pay more tax than they currently pay. For example, under the bill, large businesses would pay a minimum corporate tax rate of 15%. Right now, some very large companies that you may be familiar with, like Nike or Amazon for example, pay very little in federal taxes.

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The Inflation Reduction Act would also narrow the so-called “carried interest loophole.” Generally, that controversial tax loophole effectively allows managers of hedge, private equity, and real estate funds to pay a lower tax rate on profits than other people typically pay on their regular income.

Affordable Care Act Premium Tax Credits

The bill would also extend the expanded Affordable Care Act (ACA) program through 2025, so that eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace could continue to benefit from lower health care premiums.

Eligibility for the ACA premium tax credit program was temporarily expanded during the pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022.

Clean Energy Tax Credits for Homeowners

To support clean energy, the Inflation Reduction Act would, in some cases, provide new tax credits. Other energy-related tax credits would be extended—some of which could benefit homeowners.

For example, the bill proposes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. That tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.

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