The Inflation Reduction Act, which was signed into law on August 16, 2022, includes many initiatives such as healthcare and energy-related provisions. Below are some of the key points that you should be aware of:
The legislation authorizes the Department of Health and Human Services to negotiate Medicare prices for certain high-priced, single-source drugs. However, only 10 of the most expensive drugs will be chosen initially, and the negotiated prices will not take effect until 2026. For each of the following years, more negotiated drugs will be added.
Starting in 2025, a $2,000 annual cap (adjusted for inflation) will apply to out-of-pocket costs for Medicare Part D prescription drugs.
Starting in 2023, deductibles will not apply to covered insulin products under Medicare Part D or under Part B for insulin furnished through durable medical equipment. Also, the applicable copayment amount for covered insulin products will be capped at $35 for a one-month supply.
Affordable Care Act subsidies (scheduled to expire at the end of 2022) that improved affordability and reduced health insurance premiums have been extended through 2025. Indexing of percentage contribution rates used in determining a taxpayer’s required share of premiums is delayed until after 2025, preventing more significant premium increases. Additionally, those with household incomes higher than 400% of the federal poverty line remain eligible for the premium tax credit through 2025.
Energy-Related Tax Credits
Electric and Plug-In Hybrid (PHEV)
While many energy-related tax credits have been modified and extended, a few new credits have been added. Below are two credits that are substantial revisions and/or extensions of an existing tax credit for electric vehicles. Please note that in prior legislation, there was a 200,000-production cap on PHEV models. Now that this cap is eliminated, certain manufacturers, like Tesla and General Motors (GM), may be eligible again for a tax credit.
Eligibility Criteria for PHEV Credit on New Vehicles
A PHEV must be assembled primarily in North America to qualify for the nonrefundable tax credit beginning in 2023. Examples of vehicles that may be eligible include:
- 2022 Tesla Model 3, Model S, Model X
- 2023 Cadillac Lyriq
- 2022 GMC Hummer Pickup/SUV (maybe not)
- 2023 Chevrolet Bolt, Bolt EUV
The caveat to the above is the manufacturer’s suggested retail price (MSRP) of the vehicle in question. If the vehicle’s MSRP is higher than $80,000 for sports utility vehicles (SUV) and pickups, or $55,000 for other vehicles, then the tax credit is not available.
Assuming that the vehicle is primarily assembled in North America and meets the MSRP requirements, the final determinant is the purchaser’s modified adjusted gross income (MAGI). If the purchaser’s MAGI exceed $150,000 for a single person ($300,000 for joint filers and surviving spouses, $225,000 for heads of household), then he or she cannot receive a PHEV credit. Also, beginning in 2024, an individual can elect to transfer the credit to the dealer as payment for the vehicle.
PHEV Credit on Used Vehicles
Similarly, a tax credit of up to $4,000 is available for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000. The credit is not available if the purchaser’s MAGI exceeds $75,000 for a single person ($150,000 for joint filers and surviving spouses, $75,000 for heads of household). An individual can elect to transfer the credit to the dealer as payment for the vehicle.
Solar Tax Credits
The Inflation Reduction Act is also beneficial if you are looking to install solar and electric generating options in your home. Installation of certain materials may be eligible for a nonrefundable tax credit through 2032 of up to 30% of the cost of installation of qualifying expenses. Per the Department of Energy, qualifying expenses may include:
- Solar PV panels or PV cells used to power an attic fan (but not the fan itself)
- Contractor labor costs for onsite preparation, assembly, or original installation, including permitting fees, inspection costs, and developer fees
- Balance-of-system equipment, including wiring, inverters, and mounting equipment
- Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed (however, the energy storage devices are still subject to the installation date requirements)
- Sales taxes on eligible expenses
The Solar Tax Credit, while available until December 31, 2032, drops to 26% in 2033, then to 22% in 2034 and is eliminated in 2035. At that point, it is up to Congress to renew the tax credit.
Keep in mind that this nonrefundable tax credit can be used with certain state energy efficient credits where available. There may not be a reduction in the value of this credit when used in conjunction with other credits. For example, in Colorado, there are solar rebates and/or tax credits that may be available to the taxpayer depending on your situation.
Peak Asset Management, LLC is an SEC registered investment adviser. This is not an offer to buy or sell securities. Past performance is not indicative of current or future performance and is not a guarantee. The purpose of the blog is solely informational and does not constitute investment and/or tax advice. The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.
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