Brianna T. from Santa Barbara, CA asks: Hi Mitch, I’m writing to ask if there are any tax benefits or implications for middle-class families in the newly passed Inflation Reduction Act? Our family income is about $150,000 a year and we’re just a few years from retirement, so any tax savings would be a great help! Thank you for taking the time to respond.
Mitch’s Response:
Thanks for sending your email. There are a few notable tax implications in the Inflation Reduction Act (IRA) legislation, but none of them are outright tax cuts. There are tax credits and benefits available, but they also require some additional spending on your part. So, there’s a give and take.1
The first point to make, however, is that the Inflation Reduction Act is designed not to raise any taxes on households earning less than $400,000. So, at least in principle, you should not see your taxes increase. I say ‘in principle’ because many times it takes enacting the law to ascertain the full range of tax implications, but for the time being it appears the base case is that you will not pay any more in taxes than you do today.
4 Ways to Protect Your Retirement from Rising Inflation
Are you feeling worried about high inflation and its impact on your investments and retirement?
It’s no secret that inflation is rising, and one group that it’s affecting heavily is retirees. Rising inflation can be very costly for the economy, but what can investors, especially those nearing retirement, do to keep their investments afloat?
Instead of panicking, take a look at steps that could help reduce the sting of inflation. To help, I’m offering our exclusive guide, 4 Ways to Protect Your Retirement from Rising Inflation2. You will get insight on:
- Asset allocations that outperform inflation
- Spending categories where prices are rising the most
- Getting the most from Social Security benefits
- Plus, many more ideas to protect yourself and your assets against inflation
If you have $500,000 or more to invest, get our free guide today!
As for benefits and credits, there are a few key provisions, particularly for homeowners that could result in significant tax savings. The most noteworthy tax credit is $1,200 per year tax credit for ‘green remodeling,’ or energy-efficient improvements to your home. This is up from the previous $500-lifetime cap, which marks a major increase. In previous years, a homeowner could claim a tax credit for 10% of the cost of the energy-efficient project, up to $500. Under the new law, this credit gets a huge boost: effective January 1, 2023, a homeowner can claim up to 30% of the cost of each project, up to $1,200—each year.
The new tax credit can be applied to a variety of home improvements, like purchasing a new heat pump, water heater, HVAC systems, insulation, solar paneling, and more. Some specifics to keep in mind are the ‘sub limits’ to certain projects. The maximum credit for some air conditioners, windows, and water heaters, for instance, is $600. So even if the air conditioning job cost $5,000, the max credit would be $600. It follows that because the $1,200 tax credit is an annual credit, it may make sense for a homeowner to spread out their green remodeling projects. Do your insulation one year, and install a heat pump in another year, install solar paneling the next. If these were projects you were thinking of tackling anyway, the tax credits for doing so become substantial beginning in January 2023. So, I would wait until then to begin.
A final provision in the Inflation Reduction Act to keep in mind is that the IRS will be receiving $45 billion in new funds to improve tax enforcement, but also to modernize its outdated processing systems and hopefully improve taxpayer support. So, while the goal is to improve the ease with which you can file your taxes, there is also the possibility of more audits.
If you’re at or nearing retirement, I recommend taking a look at steps that could help reduce the sting of inflation. To help, I’m offering our exclusive guide, 4 Ways to Protect Your Retirement from Rising Inflation3. You will get insight on:
- Asset allocations that outperform inflation
- Spending categories where prices are rising the most
- Getting the most from Social Security benefits
- Plus, many more ideas to protect yourself and your assets against inflation
If you have $500,000 or more to invest, get our free guide today!
Disclosure
1 Kiplinger. August 30, 2022. https://www.kiplinger.com/taxes/605016/inflation-reduction-act-and-taxes
2 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Ways to Protect Your Retirement from Rising Inflation offer at any time and for any reason at its discretion.
3 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Ways to Protect Your Retirement from Rising Inflation offer at any time and for any reason at its discretion.
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