Inflation Reduction Act (IRA) of 2022

After almost a year of negotiations in the US Senate, one of the Biden administration’s significant legislative priorities has passed. This legislation was scaled down significantly to get support from key senators, but still has some of its original—albeit watered-down—features.

This Act has minimal impact on our clients from a financial planning perspective, but there are a few components that could affect each of us. Here is a quick summary of the provisions and their impacts.

1. The federal government can now negotiate with pharmaceutical companies directly regarding certain drugs. This provision is expected to reduce drug costs for seniors. In anticipation of these savings, drug costs for Medicare recipients will be a capped at $2,000 per year, starting in 2025.
2. For taxpayers using the Affordable Care Act exchanges (a.k.a., Obamacare), the enhanced premium subsidies have been expanded through 2025. In general, these subsidies capped premiums at 8.5% of income, among other enhancements.
3. New tax credits (up to $1,200/year) are available for making energy-efficiency improvements on homes. The improvements can be to windows or doors, and the credits even apply to more energy-efficient appliances.  Credits for home solar panels also received a big upgrade—up to 30% of the installation cost.
4. Electric car enthusiasts gained and lost in this bill. Income caps will be imposed on who can get the tax credit. For married couples filing jointly, that cap is $300,000, and for individual filers it will be $150,000. Income over that limit means buyers won’t qualify for credits. Also, cars cannot have an MSRP over $55,000 and larger vehicles (trucks/SUV’s) can’t exceed $80,000 to qualify for the credit. In addition, used electric vehicles now qualify for a $4,000 credit. The biggest change regards where the car parts are made and sourced. In an effort to produce key components in the USA versus China, the credit will be reduced or phased out for “non-American” components.  At this time, very few cars will qualify for the credit due to the materials sourcing, but this measure creates a major incentive for American production. This credit change is effective January 1, 2023, so the current credit will stay ‘as is’ through the end of 2022.
5. A new 1% excise tax will be levied on stock buybacks. Often, companies use their excess cash to buy their own shares, which reduces the shares outstanding and therefore increases the share price. They do this to avoid paying out dividends or investing in people/production. This tax is meant to encourage companies to spend money in other areas instead of only helping shareholders.
6. The Act also includes a new corporate alternate minimum tax, which basically means large companies will be subject to a minimum 15% tax.
7. The IRS will get a significant bump in funding in an effort to modernize their computer systems and facilitate enforcement. Audit rates have dropped to the lowest levels in decades, mostly due to lack of staff, so this funding will increase their auditing capacity. The IRS has stated audit rates for people making less than $400,000 are not expected to change.
8. The Act’s main purpose is to spend money on incentives for cleaner energy and climate initiatives. This effort includes direct investment in low carbon energy technologies, as well as extending the time frame for tax incentives.

Although this Act is large in terms of its financial commitments, three of its key components could affect our clients the most: 1) the electric car credit change, 2) the cap on Medicare recipients’ drug prices, and 3) an increased number of IRS audits on families with incomes in excess of $400,000.  Of course, as with anything having to do with the government, only time will tell what works and what doesn’t!

Meanwhile, if you have any questions about how the Inflation Reduction Act could impact you, feel free to reach out to your Bluerock Team.