Further muddying the financial jargon waters, Congress last month passed the Inflation Reduction Act (yes IRA!) that became law with the President’s signature. While the headline was that the IRA is intended to reduce inflation, other changes include electric vehicle credits, renewable energy credits, health insurance, and Medicare costs.
• Electric Vehicle Credits. Before the IRA was enacted, electric vehicle credits had completely disappeared for Tesla and GM EV buyers and were scheduled to sunset for Toyotas. Starting next year EV tax credits become available with all automakers but with some important changes. While most provisions take effect next year, effective immediately you only can receive a tax credit if the final vehicle assembly was
in North America. A list of qualifying vehicles can be found here (afdc.energy.gov/laws/inflation-reduction-act).
Starting in 2023, the manufacturer limitations on EV credits will be abolished (welcome back GM, Tesla, and Toyota) but will be replaced by other requirements. As before, the maximum federal tax credit will be $7,500 and is extended through 2032. Now for the changes. First, the MSRP of a vehicle cannot exceed $55,000 for a car or $80,000 for a truck or SUV, which will make it tough for those eying a Lucid or a Rivian. Second, the IRA institutes an income limitation of $150,000 for single filers and $300,000 for those married filing jointly to receive the full credit.
Starting next year additional qualifications take effect to receive the full federal tax credit. There will be a critical mineral requirement that incentivizes the mining, processing, and recycling of these materials domestically or by a country with a free trade agreement with the U.S. In addition, there is a battery components requirement that rewards manufacturing or assembly in North America. These two requirements become stricter each year. Ultimately vehicle buyers will look to manufacturers to comply with these requirements so they can collect the maximum credit.
Finally, EV credits become available next year for the first time for used vehicles purchased from a dealer starting up to $4,000 or 30 percent of the sales price, whichever is less. There are stricter income requirements for this credit with phase outs beginning at $150,000 for married filing jointly and $75,000 for single filers. Also starting in 2024, used and new EV credits may be transferred to the car dealership thus lowering the sales price.
• Residential Clean Energy Credits. As complex as the new EV credits are, the extension of the residential energy credits is more straightforward. Energy efficient upgrades including solar electric generation, water heating, and storage batteries are eligible for a 30 percent federal income tax credit through 2032. This credit was scheduled to be reduced next year, so this extension is an important one. While this credit is nonrefundable, which means it cannot reduce your tax bill to below zero, you can carry
unused credits forward to future years.
• Health Insurance and Medicare Changes. The Affordable Care Act has revolutionized the availability and cost of guaranteed issue health insurance outside of the workplace. Before the pandemic, health insurance subsidies were only available to those with an income of 400 percent of the federal poverty level, about $111,000 for a family of four this year. The IRA continues the expansion of these subsidies for health insurance available on the state or federal marketplace (healthcare.gov) so that families never have to spend more than 8.5 percent of their income on health insurance. These increased subsidies will continue through 2025 and mean that almost all people covered by ACA health insurance plans will most likely receive at least some federal tax credits.
Finally, Medicare recipients will likely see their maximum out of pocket drug costs drop over time reaching $2,000 a year in 2025. In addition, Medicare will have the ability to negotiate with pharmaceutical companies to reduce prices starting in 2025 on a limited number of drugs.
David Gardner is a Certified Financial Planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change. Some of the content provided comes from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors.
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