5 tax credits in Biden’s new law

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After about a year of work, the Inflation Reduction Act is about to become law.

President Joe Biden, who proposed the legislation last year when it was called Build Back Better, is expected to sign it into law as soon as Tuesday.

The bill passed the House and Senate last week along party lines via reconciliationa special process that allows budget bills to be approved by the Senate by a simple majority (51 votes) rather than the usual supermajority (60).

Proponents heralded the bill as an unprecedented investment in clean energy, and it shows in the breadth of tax breaks it provides for businesses and individuals, including car owners and buyers. It also extends the tax credit on health insurance premiums.

Here is an overview of the tax credits in The law project which will be available to individuals from tax year 2022.

An extended premium tax credit

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The premium tax credit is for people who purchase health insurance through an Affordable Care Act (ACA) exchange and have lower incomes. It helps offset the cost of their insurance premiums, hence its name.

The American Rescue Plan Act of 2021, another federal law created during Biden’s tenure, temporarily expanded eligibility requirements premium tax credit so that more people can qualify for it in 2021 and 2022.

The new law extends this to 2025.

A new tax credit for “clean” used vehicles

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The Reducing Inflation Act creates a new tax credit worth up to $4,000 for the purchase of a “clean used vehicle”, which will come into effect in 2023.

A used car may qualify for this credit if it is from a model year that is at least two years prior to the calendar year in which you purchased it, and you and the car are otherwise eligible. .

A revised tax credit for new “clean” vehicles

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The existing tax credit for new plug-in electric vehicles, which are currently worth up to $7,500, is getting a makeover.

Biden’s new law renames it “clean vehicle credit” and changes it in several ways, while retaining the same maximum value. Iowa State University Center for Agricultural Law and Taxation reports:

“Under the new provision, the maximum credit for qualifying vehicles is $7,500, through 2032. Half of the credit is dependent on battery components and half of the credit is dependent on whether the final vehicle was assembled in North America. The Act eliminates the per-manufacturer cap on these credits. The law also imposes income limits for eligibility for this credit ($300,000 MAGI [modified adjusted gross income] for taxpayers filing jointly or surviving spouses, $225,000 for heads of families or $150,000 for other taxpayers).

An enhanced residential clean energy credit

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The energy-efficient residential tax credit is for alternative energy equipment such as solar water heaters and geothermal heat pumps, as we detail in “9 Federal Income Tax Breaks for Homeowners.” But it is expected to expire after 2023.

The Inflation Reduction Act extends the credit through 2034 and improves it in several other ways, which Iowa State University says include:

  • Extend it to include battery storage technology
  • Make more valuable, worth up to 30% of eligible costs

An improved non-professional energy mortgage

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The non-professional energy mortgage was for certain energy-efficient components installed in or on a home – such as energy-efficient roofing, insulation, windows and doors – and associated costs. But it expired after 2021.

The new law retroactively extends this tax credit, making it available from 2022 to 2032.

The legislation also improves credit in several other ways, which Iowa State University says include:

  • Increase credit value from 10% of eligible costs to 30%
  • Repeal the lifetime credit limit, replacing it with an annual limit (which is $1,200 or $2,000, depending on the type of expense)

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