There’s been a lot of news coverage about the new Inflation Reduction Act and its implications. Pundits at every news network are already unpacking their opinions and projections on its long-term impact. For many Americans, however, the opinion-based coverage of the Act is their first exposure to it, so let’s back up.
The Inflation Reduction Act is a Democrat-backed piece of legislation. After passing in both the House and the Senate, the Inflation Reduction Act of 2022 was officially signed into law by President Biden on August 16, 2022. This act is focused on national deficit reduction as a means to combat inflation, but its sweeping scope covers much more than just taxes. It also includes substantial provisions for clean energy initiatives and domestic energy production as well as measures to lower the costs of prescription medications.
The importance of the Inflation Reduction Act is multifaceted. One item of significance is the more than $300 billion allocated toward paying off the national debt, which is a historic sum. Never before has the U.S. government dedicated such a large amount of money toward paying down the national deficit.
The Inflation Reduction Act is also important as a victory for the interests of the people over those of special interest groups and lobbyists, such as the pharmaceutical companies that campaigned against the bill’s passing. Lifesaving medications will be substantially more affordable for average Americans as a result of this bill, including Insulin, which Medicare will now cap at $35 per month.
The majority of buzz around the Inflation Reduction Act, however, and what most people consider to be the Act’s greatest point of significance is its approximately $389 billion investment in energy security and climate change. One of the Act’s core objectives is to lower national carbon emissions by roughly 40% before 2030. To accomplish this, the Inflation Reduction Act is investing in pollution cleanup programs, expanding renewable energy infrastructure, and funding tax credit programs that favor electric vehicles and energy-efficient homes.
The Inflation Reduction Act establishes funding and provisions for two primary tax credit programs designed to encourage Americans to utilize clean and renewable energy.
The EV tax credit offers $7,500 to taxpayers who report the purchase of a qualifying electric vehicle. In essence, at the end of the tax year, the government pays you back $7,500 for buying an electric vehicle. While similar credits have been available since 2010, the Inflation Reduction Act has introduced some new parameters for the program, which will take effect in phases.
The federal Incentive Tax Credit is a program that offers a tax credit, similar to a rebate, to homeowners who install solar panels and systems to power their homes. Per previous legislation, the credit amount decreased annually and was set to end after 2023. Until the Act’s passing, homeowners who installed solar panels in 2022 would be eligible for a 26% credit, homeowners who installed solar panels in 2023 would be eligible for a 22% credit, and homeowners who installed solar panels in any year thereafter would not receive a credit for any sum.
Thanks to the Inflation Reduction Act, however, the ITC has been extended for another decade. Not only has it been extended, but the amount homeowners will be credited is increasing to 30%. This provision in the new legislation makes solar energy more accessible and affordable to the average American homeowner by offering them 30% of the cost of their solar system credited back at the end of the tax year.
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