On August 16, 2022, President Biden signed into law H.R. 5376 (commonly referred to as the Inflation Reduction Act of 2022 or IRA)—the budget reconciliation legislation that includes significant law changes related to tax, climate change, energy, and healthcare. The bill was passed by the Senate on August 7, 2022, and by the House of Representatives on August 12, 2022.
The Inflation Reduction Act changed a wide range of tax laws and provided funds to improve our services and technology to make tax filing easier for you. The new law also includes a vast array of tax incentives and benefits, including a robust package of energy and climate-related provisions, as well as healthcare-related changes.
Since the Inflation Reduction Act is a 10-year plan, the changes won’t happen immediately. The following are some of the changes:
If enacted, such provisions will apply to taxable years beginning January 1, 2023. The Joint Committee on Taxation estimates the corporate AMT would raise $313 billion in revenue.
Revenue Raising Provisions
Corporate Alternative Minimum Tax
The Inflation Reduction Act of 2022 (IRA) proposes a 15% corporate alternative minimum tax (AMT) on any corporation that, in a taxable year, has an average annual “adjusted financial statement income” (AFSI) of $1 billion or more for the three-year period ending with such taxable year (or the period during which the corporation was in existence, if shorter). Importantly, the tax utilizes accounting concepts for tax rules in order to determine what is a taxable gain. The $1 billion threshold is applied in the aggregate to certain commonly controlled enterprises. Foreign-parented corporations also will be subject to the AMT if the income of their international reporting group exceeds $1 billion and the foreign-parented corporation’s average AFSI exceeds $100 million.
The AMT does not apply to S corporations, regulated investment companies, or real estate investment trusts. Corporations are exempt from the AMT following a change in ownership if they fail to meet the $1 billion threshold for a number of years to be specified in future Treasury Regulations or if they are otherwise specifically exempted by future Treasury Regulations.
A corporation’s AFSI generally is the net income or loss set forth on such corporation’s “applicable financial statement” for a given taxable year, subject to certain adjustments. For these purposes, an “applicable financial statement” generally includes audited financial statements made pursuant to GAAP or IFRS. The IRA provides adjustments be made to a corporation’s AFSI for corporations that are members of a consolidated group and to take into account AFSI from disregarded entities, partnerships and controlled foreign corporations in which a corporation owns an interest, effectively connected income, and certain other domestic and foreign taxes. Further, a corporation generally may deduct net operating losses from AFSI, and AFSI will not include any amounts credited against tax pursuant to a direct pay election under the newly proposed Section 6417 of the Code (discussed below).
Additionally, a corporation could use general business tax credits to offset the AMT, though the IRA generally would limit a corporation’s general business tax credit to 75% of the corporation’s net income tax. Finally, the proposal creates a prior-year minimum tax liability credit against non-AMT corporate tax liability equal to the net AMT over the amount allowable for credit for taxable years after 2022. During the floor amendment process, the Senate revised this section to allow depreciation against AFSI. The Senate also revised the AMT to ensure that the portfolio companies held by private equity firms would not be considered part of the common ownership, thus limiting their exposure to the minimum tax. The Senate offset the fiscal impact of that change by extending the loss limitations imposed under Section 461 until January 1, 2029.
Reinstatement of the Superfund Tax
The IRA would reinstate the hazardous substances superfund taxes imposed under Section 4611 and increase the per barrel financing rate from 9.7 cents to 16.4 cents, indexing the rate going forward.
Imposition of a stock buy-back excise tax
The IRA would impose a 1% excise tax on the repurchase of stock by a domestic corporation traded on an established securities market. Generally, the excise tax would be imposed on the value of the stock repurchased and would be reduced by the value of any stock issued during the tax year. The legislation provides several exceptions to the excise tax, including if the repurchase was part of a reorganization for tax purposes, if it is part of an employer-sponsored retirement plan or employee stock ownership plan, and for repurchases treated as dividends for tax purposes.
Funding Internal Revenue Service Enforcement and Improving Taxpayer Compliance
The IRA provides approximately $80 billion of funds to the Internal Revenue Service (IRS) over a ten-year period for tax enforcement, compliance, operations support, and modernization. Specifically, the IRA provides $3.18 billion for taxpayer services, $45.64 billion for enforcement, $25.33 billion for operations support, and $4.75 billion for business systems modernization. The IRA provides funds to the Treasury Inspector General for Tax Administration, Office of Tax Policy, U.S. Tax Courts, and the Treasury Departmental Offices. It also provides $15 million for the IRS to deliver a report to Congress detailing the cost and feasibility, among other factors, of developing a free direct e-file tax return system. The IRA notes that none of the IRS appropriated funds may be used by the IRS to increase taxes on taxpayers with income below $400,000. The Congressional Budget Office estimates that such measures allow the IRS to raise $124 billion in revenue.
Energy Security and Climate Provisions
The IRA extends and expands both the production tax credit (PTC) under Section 45 of the Code and the investment tax credit (ITC) under Section 48 of the Code. The IRA proposes a new Section 6417 that would allow certain taxpayers to elect to receive direct payment of certain tax credits. Generally, only certain tax-exempt and government entities would be eligible to make such an election. However, Section 6417 allows for other taxpayers to receive direct payment of specifically enumerated tax credits for clean hydrogen production, carbon capture, and domestic advanced manufacturing projects. The IRA also would allow eligible taxpayers (such as corporations and other entities not eligible to make a direct pay election) to transfer certain clean energy tax credits to unrelated taxpayers for cash consideration. The consideration would neither be includable in the income of the transferee taxpayer nor deductible by the transferor.
Production Tax Credit (Section 45)
The IRA extends the PTC for wind, geothermal, and solar (and other specified technologies) projects that are placed into service after December 31, 2021, and begin construction before January 1, 2025. Projects placed into service before 60 days after the Treasury publishes guidance on the prevailing wage and apprenticeship requirements may take the full PTC of 1.5 cents per kilowatt hour. Projects with construction starting 60 days or more after Treasury publishes prevailing wage and apprenticeship guidance must meet those requirements to qualify for the full PTC. For projects that do not meet the prevailing wage and apprenticeship requirements, the PTC is 0.3 cents per kilowatt hour. Projects may also receive 10% bonus credits each for meeting domestic content requirements and/or locating the project in an energy community. “Energy community” is defined as a brownfield site, a census tract, or adjoining tract in which: (1) a coal mine closed in 2000 or later, (2) a coal-fired electric power plant was retired in 2010 or later, or (3) the site or tract had significant employment related to the extraction, processing, transport, or storage of fossil fuels after 2000.
Investment Tax Credit (Section 48)
The IRA extends the ITC for wind, geothermal, solar, and energy storage technologies projects that are placed in service after December 31, 2021 and begin construction before January 1, 2025. Like the PTC, projects placed into service 60 days after the Treasury publishes guidance on prevailing wage and apprenticeship requirements may take the full ITC of 30%. Projects with construction starting 60 days or more after Treasury publishes prevailing wage and apprenticeship guidance must meet those requirements to qualify for the full ITC. Otherwise, the ITC is 6%. Like the PTC, projects may also receive 10% bonus credits each for meeting domestic content requirements and/or locating the project in an energy community.
The provision also includes a bonus credit available only for solar and wind facilities. Solar and wind facilities placed in service in low-income communities are eligible for a 10% bonus credit if the project is in a low-income community or tribal land, or 20% if the project is part of a low-income residential building project or low-income economic benefit project.
Clean Electricity Production Credit (Section 45Y)
The IRA creates a new technology-neutral credit for any project placed into service after December 31, 2024, that generates electricity and has a greenhouse gas emission rate that is not greater than zero. The credit is equal to the PTC outlined above. The credit phases out over four years based on the later of either the Secretary determines that the annual greenhouse gas emission from the production of electricity in the United States is equal to less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for 2022 or 2032. The credit is phased out from 100% for construction beginning in the first calendar year after such date to 75% in the second year, 50% in the third year, and 0% in the fourth year.
Clean Electricity Investment Credit (Section 48D)
The IRA creates a new technology neutral credit for energy storage technologies placed into service after December 31, 2024, that generate electricity and have a greenhouse gas emission rate that is not greater than zero. The credit is equal to the ITC credit outlined above. This credit includes the same phase out provision outlined in the Clean Electricity PTC outlined above.
Zero-Emission Nuclear Power Production Tax Credit (Section 45U)
The IRA creates a new PTC for existing nuclear power facilities (that are not an advanced nuclear power facility and placed in service prior to enactment of the IRA). Projects are eligible for a maximum credit of 1.5 cents per kilowatt hour if prevailing wage requirements are met; otherwise the maximum credit is 0.3 cents per kilowatt hour. This credit is applicable to electricity produced and sold after December 31, 2023 and the credit terminates for taxable years beginning after December 31, 2032.
Carbon Capture and Sequestration (CCS) Credit Enhancements (Section 45Q)
The IRA includes several enhancements to the CCS credit, including:
- A commence construction window extension. Any carbon capture, direct air capture, or carbon utilization project that commences construction before January 1, 2033 will qualify for a 12-year 45Q credit.
- Direct pay for installation of carbon capturing equipment. For-profit entities will receive direct pay for the first five years after the carbon capture equipment is placed in service.
- Increased credit values for industry and power. The 45Q credit value for any capture equipment placed in service after December 31, 2022 is increased to $85 per metric ton for industrial facilities and power plants that store captured CO2 in saline geological formations; $60 for utilization of captured CO2 and its precursor carbon monoxide to produce low- and zero-carbon fuels, chemicals, building materials, and other products; and $60 for Enhanced Oil Recovery storage. After 2026, the credit values are indexed to inflation.
- Lower capture thresholds for credit eligibility. The direct air capture threshold is lowered to 1,000 metric tons per taxable year. The threshold for electric generating facilities is lowered to 18,750 metric tons per taxable year, paired with design capacity requirements. The threshold for any other facility is lowered to 12,500 metric tons per taxable year.
- Capture equipment requirements. Point-source capture projects on electric generating units will be required to design capture equipment to capture at least 75% of unit CO2 production, subject to a review if facility emissions increase in future years.
Clean Hydrogen Production Tax Credits (Section 45V)
The IRA creates a PTC for clean hydrogen production for projects placed into service after December 31, 2022 and construction that begins before January 1, 2033. Like the requirements of the PTC, projects placed into service before 60 days after the Treasury publishes guidance on prevailing wage and apprenticeship requirements may take the full credit of $3.00 per kg times the “applicable percentage.” Projects with construction starting 60 days or more after Treasury publishes prevailing wage and apprenticeship guidance must meet those requirements to qualify for the full ITC. Otherwise, the credit is $0.60 per kg multiplied by the “applicable percentage.” The bill defines applicable percentage as the following:
- 4kg of CO2e – 2.5kg of CO2e: 20%
- 2.5kg of CO2e – 1.5kg of CO2e: 25%
- 1.5kg of CO2e – 0.45kg of CO2e: 33.4%
- >0.45kg of CO2e: 100%
The production tax credit applies until January 1, 2025. The bill also establishes a sliding scale investment tax credit of 1.2% to 6% for clean hydrogen projects that may be used instead of the production tax credit.
Advanced Manufacturing Production Credit (Section 45X)
The IRA creates a production tax credit for the domestic production and sale of qualifying components for energy projects, including for the production of solar and wind related components, batteries, and critical minerals. The tax credit for each component decreases by 25% each year beginning in 2029 and ends in 2032. The tax credit also increases by 10% for components manufactured in facilities under a collective bargaining agreement. The component and credit values include:
- Thin PV cells: $0.04 per watt
- Inverters: applicable amount with respect to such inverter
- Crystalline PV cell: $0.04 per watt
- PV wafer: $12 per square meter
- Solar grade polysilicon: $3 per kg
- Solar module assembly: $0.07 per watt
- Torque tube and longitudinal purlin: $0.87 per kg
- Structural fastener: $2.28 per kg
- Central inverter: $0.025 per watt
- Utility inverter: $0.015 per watt
- Commercial inverter: $0.02 per watt
- Residential inverter: $0.065 per watt
- Microinverter: $0.11 per watt
- Blade: $0.02 per watt
- Nacelle assembly: $0.05 per watt
- Tower: $0.03 per watt
- Offshore wind foundation: $0.02 per watt (fixed) and $0.04 per watt (floating)
- Offshore wind vessel: 10% of sales price
Batteries: product of $10 (or $45 for battery modules that do not use battery cells) multiplied by the capacity of the battery (expressed on a kilowatt hour basis)
Critical minerals: 10% of costs incurred by the taxpayer with respect to production
Advanced Energy Project Credit
The IRA reinstates and expands the Section 48C qualified advanced energy property credit, providing new authority to the Treasury Secretary to allocate $10 billion in tax credits to qualifying projects. Of that total, $4 billion is set aside for allocations in census tracts in which a coal mine or coal-fired power plant has closed and which has not received a Section 48C allocation in prior years. To receive the full 30% credit, the qualifying investments must be carried out using labor paid at prevailing wages and meeting the relevant apprenticeship requirements.
Clean Vehicle Tax Credit
The IRA creates a “Clean Vehicle Credit,” which includes hydrogen-powered vehicles, of $4,000 for lower/middle income individuals to buy used clean vehicles and up to $7,500 for purchases of new clean vehicles. The maximum credit is available for vehicles with battery components and critical minerals sourced domestically or from countries where the United States has a free trade agreement. Families making up to $300,000 or individuals making up to $150,000 are eligible for the credit. The IRA also lifts the 200,000 electric vehicle cap on manufacturers. The legislation also creates a tax credit for qualified commercial clean vehicles of up to 30% of the cost (up to $7,500) for vehicles weighing less than 14,000 pounds and up to $40,000 for all other vehicles. Such vehicles must be, generally, electric or meet the requirements of existing Section 30B(b)(3)(A)-(B). Certain internal combustion vehicles are eligible for a 15% credit.
Alternative Fuel Refueling Property Credit (Section 30C)
The IRA extends the Section 30C credit through 2032, effective from December 31, 2021, allowing investments made in 2022 to qualify. Beginning in 2023, the IRA expands the credit from $30,000 to a maximum of $100,000 (so long as the expenses are of a character to qualify for the bonus amount), measured on a per charging unit or pump installed, and limits the credit to equipment installed in a low income or rural census tract. The IRA also clarifies that bidirectional charging equipment qualifies for the credit.
Energy Efficient Home Improvement Credit (Section 25C)
The IRA extends the nonbusiness energy property tax credit until 2032 and increases the tax credit from 10% of cost of energy efficiency improvements and energy property expenditures incurred to 30%. The IRA also increases the maximum tax credit from $600 to $1,200 per taxpayer.
Residential Clean Energy Credit (Section 25D)
The IRA extends the tax credit until 2034 and modifies the phaseout of the credit to match the extension’s timeline. The IRA also amends the definition of battery storage technology qualifying under the tax credit.
New Energy Efficient Home Credit (Section 45L)
The IRA expands and extends the Section 45L new home efficiency credit through 2032. Taxpayers purchasing a new single-family home that meets the relevant ENERGY STAR Single-Family New Homes National Program Requirement are eligible for a $2,500 tax credit or a $5,000 tax credit for homes meeting the Department of Energy’s Zero Energy Ready Home Program. A similarly structured credit is available for multifamily homes meeting relevant ENERGY STAR or Zero Energy Ready Home requirements, except the credit is structured to provide a bonus credit amount so long as prevailing wages were paid during construction of the multifamily units.
Energy Efficient Commercial Buildings Deduction (Section 179D)
The IRA modifies the energy efficient commercial buildings deduction to increase the maximum amount of the deduction. The IRA also adds in prevailing wage and apprenticeship requirements for the deduction.
High Assay Low Enrichment Uranium (HALEU)
The IRA includes $500 million for the development of domestic HALEU fuel, $100 million in funding to assist in licensing HALEU fuel fabrication and enrichment facilities, and $100 million to assist in the re-standing up of a U.S. domestic enrichment capability.
The IRA includes $2 billion for the DOE Loan Program Office, $760 million for state siting grants, $100 million for interregional and offshore transmission planning and analysis, and tax credits for the interconnection of wind and solar facilities below 5MW in capacity.
Defense Production Act
The IRA includes $500 million for FY 2022, which will remain available until September 30, 2024, to carry out the Defense Production Act for critical minerals and heat pump production.
Although the IRA does not itself include specific permitting reform provisions, the agreement released by Senate Democrats calls for a comprehensive permitting reform package to be passed by the end of the year. These permitting reform provisions are not in the IRA due to the restraints of the reconciliation process limiting items to budgetary provisions. These permitting reforms will need the support of at least 10 Republicans in the Senate. Historically, Republicans have been supportive of permitting reform, with Sen. Kevin Cramer (R-ND) recently leading discussions in earlier, bipartisan talks with Sen. Manchin. However, given their unanimous opposition to the IRA, it is unknown if they will support further efforts to support the Democrat’s agenda before the 2022 midterm elections.
Permanent Extension of Tax Rate to Fund Black Lung Disability Trust Funds (Section 13901)
Under current law, an excise tax is imposed on coal from mines in the United States. The tax rate depends on how the coal is mined. The current rates are $0.50 per ton for coal from underground mines and $0.25 per ton for coal from surface mines, with both limited to 2% of the sales price. The Black Lung excise tax is intended to fund benefits for U.S. coal miners who develop Black Lung disease as a result of working in coal mines. Temporary, higher rates of $1.10 per ton of coal from underground mines and $0.55 per ton of coal from surface mines, limited to 4.4% of the sales price, have applied for much of the time since 1986. They most recently applied from the beginning of 2020 through the end of 2021. This provision would permanently extend the higher rates
Increase in Research Credit Against Payroll Tax for Small Business (Section 13902)
Under current law, businesses are allowed a credit against income tax that is based on their qualified research expenses. The credit is calculated as the number of qualified research expenses above a base amount that is meant to represent the number of research expenditures in the absence of the credit. Some small businesses may not have a large enough income tax liability to take advantage of their research credit. Current law allows a small business, defined as a business with less than $5 million in gross receipts and that is under five years old, to apply up to $250,000 of the research credit toward its Social Security payroll tax liability. This provision would allow an additional credit of up to $250,000 against Medicare Hospital Insurance tax for taxable years beginning after December 31, 2022. The credit could not exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
Reinstatement of Limitation Rules for Deduction for State and Local, etc., Taxes; Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers (Section 13903)
This provision would reinstate the current-law expiration date of the state and local tax (SALT) limitation enacted in Section 13904 of the bill. In other words, the expiration date would remain 2025, as under current law. The provision would also extend the limitation on excess business losses of noncorporate taxpayers. Businesses are generally permitted to carry over a net operating loss (NOL) to certain past and future years. Under the passive loss rules, individuals and certain other taxpayers are limited in their ability to claim deductions and credits from passive trade and business activities, although unused deductions and credits may generally be carried forward to the next year. Similarly, certain farm losses may not be deducted in the current year but can be carried forward to the next year. For taxpayers other than C corporations, a deduction in the current year for excess business losses is temporarily disallowed (through 2026) and such losses are treated as an NOL carryover to the following year. An excess business loss is an amount that a taxpayer’s aggregate deductions attributable to trades and businesses exceed the sum of (1) aggregate gross income or gain attributable to such activities and (2) $250,000 ($500,000 if married filing jointly), adjusted for inflation. For partnerships and S corporations, this provision was applied at the partner or shareholder level. This provision would extend the temporary limitation through 2028.
Removal of Harmful Small Business Taxes; Extension of Limitation of Deduction for State and Local, etc., Taxes (Section 13904)
In addition to the modification noted in Section 10101 above, this provision would have extended the $10,000 state and local tax (SALT) limitation from 2025 through 2026. However, the SALT change would effectively be reversed by changes made in Section 13903 of the bill.
2022-2023 Tax Brackets and Federal Income Tax Rates
America’s income tax rates are staying the same for the next two tax seasons. But the tax brackets—the income buckets that are charged at progressively higher rates—are undergoing major inflation adjustments because of the highest price increases in decades.
The IRS has released tax brackets for the 2023 tax year that have upper limits 7% higher than the brackets for 2022 returns. If your income isn’t keeping up with inflation, the increases in the brackets make it less likely you’ll pay higher tax rates.
You can use the tax brackets to determine how much you can expect to pay in taxes each year. Here are the tax brackets for the 2022 and 2023 tax years, plus instructions on how to calculate your income tax based on the top bracket that applies to you.
The 2022 Income Tax Brackets (for taxes due in April 2023)
For the 2022 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your tax bracket is determined by your filing status and taxable income.
2022 Single Filers Tax Brackets
2022 Married Filing Separately Tax Brackets
2022 Head of Household Tax Brackets
2022 Married Filing Jointly Tax Brackets
The 2023 Income Tax Brackets (for taxes due in April 2024)
The 2023 tax year will have the same seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your filing status and taxable income, including wages, will determine your bracket.
2023 Single Filers Tax Brackets
2023 Married Filing Separately Tax Brackets
2023 Head of Household Tax Brackets
2023 Married Filing Jointly Tax Brackets
What Are Tax Brackets?
Tax brackets were created by the IRS to implement America’s “progressive” tax system, which taxes higher levels of income at the progressively higher rates we mentioned earlier. The brackets help determine how much money you need to pay the IRS annually.
The amount you pay in taxes is dependent on your income. If your taxable income increases, the taxes you pay will increase.
But figuring out your tax obligation isn’t as easy as comparing your salary to the brackets shown above. For example, if you’re single and your 2022 taxable income is $50,000, not all of that will be taxed at 22%, the top bracket for a single person making $50,000. Some of that will be taxed in lower brackets.
How To Figure Out Your Tax Bracket
You can calculate your taxes by dividing your income into the portions that will be taxed in each applicable bracket. Every bracket has its own tax rate. The bracket you’re in depends on your filing status: if you’re a single filer, married filing jointly, married filing separately or head of household.
The tax bracket your top dollar falls into is your marginal tax bracket. This bracket is your highest tax rate–which applies to the top portion of your income.
For example, if you are single and your 2022 taxable income is $75,000, your marginal tax bracket is 22%. However, some of your income will be taxed in lower tax brackets: 10% and 12%. As your income moves up the ladder, your taxes will increase:
- The first $10,275 is taxed at 10%: $1,027.50.
- The next $31,500 (41,775-10,275) is taxed at 12%: $3,780.
- The last $33,225 (75,000-41,775) is taxed at 22% $7,309.50
- The total tax amount for your $75,000 income is the sum of $1,027.50 + $3,780 + $7,309.50 = $12,117 (ignoring any itemized or standard deductions that may apply to your taxes).
How To Get into a Lower Tax Bracket
You can lower your income into another tax bracket by using tax deductions, such as the write-offs for charitable donations, property taxes, and mortgage interest. Deductions help cut your taxes by reducing your taxable income.
Tax credits, such as the earned income tax credit or child tax credit, also can put you into a lower tax bracket. Credits provide a dollar-for-dollar reduction in the amount of taxes you owe. Depending on your financial situation, you can use both tax deductions and credits to lower the amount you pay each year.