One thing in life you can always count on is that tax laws will never be simple in language or applicability! President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022. Immediately, much hoopla ensued from the Biden Administration touting its effectiveness and from opponents as to its contribution to inflation instead of reducing the negative economic impact. The law is more than 300 pages in length and contains some of the most difficult language for citizens to apply to their person financial situations. However, lets review a few of the provisions of the law that applies to individuals.
A major funding measure of the bill is to increase, or some say replace, the number of IRS agents and revenue officers employed in the areas of audits and tax collections. It is not contained within the law but many of the lawmakers are parroting the intent was that individuals earning greater than $400,000 annually would be subject to increased scrutiny by IRS audits. Realistically, if your return were to report less than the aforementioned amount while containing information that is suspect, you may be selected for audit. The IRS uses an algorithm to select returns for audit and the variables of the selection formula are not disclosed to the public. Consequently, Treasury Secretary Janet Yellen has issued a directive that the IRS should implement new compliance programs in a manner as to not increase examinations of taxpayers earning less than $400,000.
The majority of the law’s provisions pertain to green energy in the form of tax credits. One of the major areas of green energy investment that may apply to a greater number of individuals is the credit for the purchase of clean vehicles (a.k.a., electric vehicles). To claim the maximum amount of the credit of $7,500, the taxpayer must meet vehicle manufacturing criteria as well as income limitations. For example, the automobile shall be produced by a specific qualified manufacturer (i.e., defined as one that primarily utilizes union labor), its final assembly is in North America and the components must be sourced to a U.S. manufacturer or any country with which the U.S. has a free trade agreement in effect. For purposes of annual income limitations, individuals earning more than $150,000, head of household filers earning more than $225,000 and married filing joint filers earning more than $300,000 would not be availed the credit. These criteria will make it difficult for many individuals to take advantage of the credit.
Additional limitations in the law impact the purchase price of the clean vehicle. If the manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles, and pickup trucks as well $55,000 for any other types of vehicles, the buyer will not be allowed to claim the credit of $7,500 for federal tax purposes. If you were hoping for a Tesla Model 3, this credit will not help you purchase the car!
Homeowners may benefit from the law by installing qualified energy efficient windows, doors and HVAC systems as well as heat pumps. The limit is applied annually for the credit of $1,200.
Coincidentally, the limitation on state and local tax deductions for individuals was not addressed in the law. Individuals may deduct, as an itemized deduction, an amount of $10,000 of state and local taxes. In states, such as California and New York, where individuals are subject to higher income tax rates than many of the other states, taxpayers are feeling a pinch because of the nondeductible portion of their state and local income taxes. Time will tell if this area of taxation is addressed in the future.
Taxes are part of living in a civilized society. Many people show tremendous disdain for paying any taxes subjected to their income. However, our wonderful country and state would not function for the purposes of society without funding. It is critical that you comply with the complex tax laws of our nation and state. If you have a question as to the applicability of a tax law or simply wish to plan for the future to reduce your tax burden, it is imperative you visit a CERTIFIED FINANCIAL PLANNER™ professional. Real tax savings may be gained by managing your income and tax burden in the proper manner. Welcome to football season!!