Adding to the list of tax credits made available in the last few years, the recently-passed Inflation Reduction Act (IRA) introduced and expanded on several tax credits, including tax incentives for purchasing electric vehicles and installing high-efficiency home improvements. These tax credits and deductions can really add up on your personal income tax return by reducing your tax liability, so qualifying taxpayers may want to start planning now. Below are some recently introduced tax deductions and credits for individual taxpayers. We always recommend consulting a qualified CPA before claiming a deduction or credit with detailed qualifying rules.
Electric Vehicle Credits
The IRA includes a wide range of tax incentives aimed at combating the effects of climate change, one of which is the expansion of the Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC Section 30D), now known as the Clean Vehicle Credit. With this ten-year extension in federal tax credits, there’s never been a more incentivized time to buy an electric vehicle (EV). But driving off in an electric vehicle doesn’t mean getting a deduction by default.
The maximum credit available is $7,500:
- $3,750 if the qualifying vehicle meets a critical minerals requirement
- Another $3,750 credit if the vehicle meets a new battery component requirement
The clean vehicle credit applies to the following:
- Any clean vehicle, including hydrogen fuel cell cars or plug-in hybrids
- Single filers with modified adjusted gross income (MAGI) less than $150,000
- Married couples filing jointly with MAGI less than $300,000
- Heads of household with MAGI less than $225,000
- Pickup trucks, vans, and SUVs with manufacturer’s suggested retail prices (MSRPs) of less than $80,000
- Cars with MSRPs less than $55,000
- Used clean vehicles that cost less than $25,000
- Vehicles for which final assembly occurred in North America
- From 2023, at least 40% of critical battery minerals and 50% of battery components must be manufactured, mined, or recycled in the U.S.
Another significant change included in the IRA is the removal of the 200,000 vehicle cap from 2023. In the past, you could no longer qualify for the tax credit if you purchased an EV from a manufacturer that had produced more than 200,000 EVs.
There are several other clean vehicle credits to be found in the IRA:
- Starting in 2023, used cars qualify for a tax credit of up to $4,000
- Purchase incentives for charging stations
- Generous credits for commercial EVs
- Point of Purchase Option from 2024, which will allow auto dealers to offer the tax credit to customers as a cash rebate at the time of purchase
Although there are still many unanswered questions about how the new Clean Vehicle Credit will be implemented, we anticipate further guidance by the end of the year.
Renewable Energy Credits
The IRA includes some $30 billion in clean energy tax credits for resources such as solar and wind energy, as well as battery storage. In the IRA, the Residential Energy Credit was renamed the Residential Clean Energy Credit. In addition to up to $14,000 in rebates and tax credits, these measures can help homeowners save more than $1,000 per year on utility bills and help the United States reach its clean energy goals.
Before the IRA, only homeowners and commercial entities with some tax liability could claim the tax credits when installing solar panels, wind turbines, or other eligible technologies on a property or qualifying facility. Now, the direct pay option means non-taxable entities can also benefit from these credits. Credits are also now available for other zero-emission technologies, such as nuclear power production, geothermal, carbon dioxide sequestration, and clean hydrogen production.
Here are some of the credits available:
- Qualifying high-efficiency home improvements qualify for an annual $1,200 credit
- Energy-efficient heat pumps, central air conditioners, water heaters, wood stoves, and natural gas or oil furnaces or boilers qualify for a $2,000 credit
- The solar tax credit will reimburse homeowners 30% of the cost of residential solar panels
- A new battery tax credit of 30% (convertible to a point-of-sale rebate) is available for standalone battery storage with more than three kilowatt-hours storage capacity in residential units.
- Storage devices with less than one-megawatt capacity are also eligible for the clean electricity tax credit.
You can find a detailed list of items eligible for a residential energy credit on the IRS website.
Mortgage Insurance Premiums Deduction
The portion of your monthly mortgage payment that covers Private Mortgage Insurance (PMI), or Mortgage Insurance Premiums (MIP), is deductible thanks to the Consolidated Appropriations Act of 2020. Generally, home buyers with less than 20% equity pay PMI, and the monthly premium can range from about $30-$70 per $100,000 of loan. Taxpayers have been able to deduct PMI in the past, and the Consolidated Appropriations Act extended the deduction.
The deduction is subject to qualified taxpayers’ AGI limits and begins phasing out at $100,000 and ends at those with an AGI of $109,000 (regardless of filing status). If you’re married and filing separately, the phase-out begins at $50,000 and ends at those with an AGI of $54,500. The deduction applies to premiums on mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and private insurers. To take the mortgage insurance deduction, you must itemize deductions on your tax return.
Forgiven Mortgage and Student Loan Debt
Generally, canceled debt is reported as income on the debtor’s tax return. The American Rescue Plan excluded debt canceled from forgiven mortgages and student loans from the regular cancellation of debt rules, renewing the mortgage exclusion through 2025. However, the renewal reduces the maximum amount of mortgage debt that can be excluded to $750,000, down from $2 million. Canceled student loan debt is uncapped on federal tax returns, but may be taxed by certain states.
Are you eligible for these new tax deductions?
If you think you can benefit from one or more of these extended credits and deductions, schedule a consultation with one of our CPAs for personalized advice on how to ensure you qualify.