Inflation Reduction Act: A Quick Summary

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The passing of the Inflation Reduction Act was one of the many financial headlines coming out of last month that we felt required a little extra explanation. We sourced this quick summary in an effort to lay out the fundamentals.

Last month, President Joe Biden signed into law the Inflation Reduction Act of 2022. Although this legislation is a pared down version of the President’s signature Build Back Better bill, there are three primary objectives of the Inflation Reduction Act:

  1. To fight climate change
  2. To lower the cost of healthcare
  3. To increase tax revenues

Fighting Climate Change

The Inflation Reduction Act essentially offers incentives in the form of tax credits for companies and individuals to adopt green energy. The hope is that by offering these tax credits, the government is encouraging broader adoption and technological innovation that will eventually drive costs down over time, making renewable energy more widely available.

It’s important to note that there are also pieces of the bill that subsidize fossil fuels to help ease America’s continued transition toward more renewable energy sources.

Lowering the Cost of Retiree Healthcare

The bill’s highlights from the consumer’s perspective are the changes to Medicare (not private insurance) drug costs. Starting next year, insulin costs will be capped at $35 per month. And in 2025, Part D out-of-pocket maximums will be capped at $2,000 per year. These are both significant changes that will positively impact retirees.

Additionally, this bill corrects some of the flaws of the Medicare Modernization Act of 2003 by allowing Medicare to negotiate drug prices with pharmaceutical companies on some of the most expensive drugs starting in 2026.

It’s a natural question of whether these changes will cause premiums to rise? We can’t know yet, but anyone who has turned 65 knows that the world of Medicare is intensely competitive, so insurers are incentivized to keep premiums low to be as competitive as possible.

Increasing Tax Revenues

There are two primary ways the bill is planning to increase tax revenues. One is raising taxes on large corporations by implementing a 15% minimum tax on companies with $1 billion or more in profits and adding a 1% tax on stock buybacks.

  • Alternative Minimum Tax (“AMT”) – Brings back the Alternative Minimum Tax for large C corporations (previously eliminated by the Tax Cuts and Jobs Act of 2017 (“TCJA”)). This tax will apply to C corporations with average financial statement income of $1 billion or more for the three prior years. There is a carve out for manufacturing corporations and subsidiaries of private equity firms.
  • Stock Repurchases – Imposes a 1% excise tax on the value of stock repurchases that occur after January 1, 2023 by certain publicly traded domestic corporations.

Secondly, the bill significantly increases the budget for IRS tax enforcement. The idea is that additional enforcement of our current tax code will result in more taxes being collected. While not an increase in individual taxes, it will likely result in more tax revenue.

Other Notable Tax Considerations

  • Non C Corporation Losses – Extends the excess business loss limitation on trade or business losses through 2028. Excess business loss limitations were created by the TCJA of 2017 and limit the amount of trade or business losses (indexed for inflation) that can offset nonbusiness income in any given tax year. The provisions were suspended by the CARES Act for 2018-2020 but are now back in effect.
  • State and Local Taxes (SALT) – While the SALT limitation was eliminated in the Build Back Better plan, that provision did not make it into the Inflation Reduction Act. However, the limitation was not extended and is therefore set to expire in 2025, eliminating the $10,000 annual cap on the SALT deduction.

How Will the Inflation Reduction Act Impact You?

There are two ways the bill might benefit you. For one, the noted decreases in prescription drug costs and caps on Part D expenditures are significant.

Secondly, you may take advantage of some of the tax credits available for electric vehicles or energy-efficient home improvements.

As always, we are here to help you sort through the myriad of new and evolving tax legislation. Don’t hesitate to reach out to discuss your personal situation.

Source: H.R.5376 – Inflation Reduction Act of 2022

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