What You Need to Know
President Joe Biden signed the Inflation Reduction Act into law on August 16, 2022. This legislation contains multiple components that can be categorized as either revenue or investment. According to estimates, the total revenue raised will be $737 billion, investments will be $437 billion and that will leave about $300 billion for deficit reduction.
Revenue
The new legislation protects families and small businesses making $400,000 or less from tax increases, but there will be increases for others.
- 15% Corporate Minimum Tax on companies making more than $1 billion per year. According to the Joint Committee on Taxation, this is expected to raise about 40% of the total revenue and will be paid by about 150 large firms.
- Stock Buybacks: New 1% tax on corporations’ net repurchase of stock
- Extension of the limitation on the deduction of pass-through losses, which was due to expire at the end of 2026. It is now extended through 2028.
- IRS Tax Enforcement Funding: Approximately $80 billion will be invested over the next decade for IRS enforcement activities including hiring and training new auditors, modernizing IT systems and taxpayer services to try to collect taxes from wealthy individuals looking to dodge taxes. This is expected to raise approximately $200 billion.
Investment
Investment in domestic energy production and manufacturing is included in the law with a goal to reduce energy costs for Americans and reduce carbon emissions approximately 40% by 2030. Additionally, lowered health care costs and extended tax credits may benefit Medicare recipients and those who use the ACA (Affordable Care Act) marketplace.
- Energy & Climate Spending and Tax Breaks: Approximately $370 billion will be invested in spending to curb emissions and promote green technologies.
- Residential green-energy upgrades such as solar panels, electric water heaters, electric cooktops, electrical panels or repaired wiring, and efficient heat pumps may receive tax credits or rebates.
- Incentives up to $7,500 for the purchase of electric vehicles, in certain circumstances
- Many corporate green-energy incentives are in the new legislation, including grants, loans and tax incentives designed to help companies lower their carbon footprint.
- Health Care
- Reduction in Health Care Costs: An expansion of Medicare benefits will include lower prescription drug costs. Provisions include free vaccines (2023), $35 per month insulin (2023), and caps out-of-pocket drug costs to an estimated $4,000 or less in 2024 and settling at $2,000 in 2025 for people enrolled in Medicare Part D, the prescription drug plan for seniors.
- Medicare can negotiate lower prices for some drugs. Beginning in 2026, Medicare can negotiate pricing for 10 high-cost drugs, and this will increase to up to 20 drugs by 2029.
- Affordable Care Act (ACA) gets an extension on premium assistance for the next 3 years. Eligibility has been expanded, and provisions that were due to expire at the end of 2022 have been extended through 2025.
Deficit Reduction
The excess revenue of approximately $300 billion is intended to be used for deficit reduction. There are however conflicting opinions as to whether the Inflation Reduction Act will actually reduce inflation. According to a Penn Wharton Budget Model, Senate-Passed Inflation Reduction Act: Estimates of Budgetary and Macroeconomic Effects, published on August 12, 2022, it is projected that the new legislation will have a very modest impact on inflation over the next decade.
If you have questions about how the Inflation Reduction Act may impact you, or your business, or would like to learn more about benefits you may be entitled to under the new legislation, please contact us.
