Are you curious about the Inflation Reduction Act, what it is, and how it impacts you personally? Here are the key highlights that are most likely to impact you directly.
What’s The Inflation Reduction Act?
The Inflation Reduction Act is the current form of the Build Back Better Plan. It allocates federal dollars toward health care reform, combating climate change, and increasing resources for the IRS.
Of course, none of those things are free. Planned expenditures add up to a hefty $739 billion estimated price tag. So how will the country pay for it all?
The majority of the funding will be provided by increased tax revenue from corporations. They will face larger tax bills from closing certain loopholes, but there may also be some special tax breaks for green buying practices.
Let’s review the critical points of the legislation.
New Tax Rates on Corporations
Adding a 15% corporate minimum tax, or CMT means businesses with over $1 billion in reported income will pay at least 15% of their revenue in taxes. This would apply to about 150 corporations.
Corporations that purchase their shares in a “buyback” may also have to pay an excise tax of 1% on those purchases.
Extended Affordable Care Act Premium Tax Credit
The Affordable Care Act, or “Obamacare,” provided tax credits that helped lower the cost of health insurance purchased on the healthcare marketplace. These were initially set to expire in 2022, but the Inflation Reduction Act extends them through 2025.
If you’re looking to leave the workforce before you turn 65, this is excellent news as it could help reduce your premiums and save you money until you’re eligible for Medicare.
Electric Vehicle (EV) Tax Credit
This legislation also introduced stricter qualifications to take advantage of the EV tax credit. So if you’re looking to ditch your gas guzzler, you need to understand these rules and how it might impact your purchase decision. Points to consider include:
- Effective March 2023, the credit will only apply to vehicles whose final assembly occurs in North America. Additionally, critical components of the vehicle must be primarily sourced from North America.
- Some models will have a retroactive incentive dating back to January 1, 2023.
- You’ll also have to watch out for the sales price. Only Vans, trucks, and SUVs with an MSRP below $80,000 or cars with an MSRP below $55,000 qualify for the credit.
- Your income cannot exceed certain thresholds depending on your tax filing status.
- Single – $150,000
- Married – $300,000
- Starting in 2024, you can claim the credit when you buy the car rather than waiting until you file your taxes.
The rollout of EV incentives has been a bit bumpy, especially for those buying the Tesla Model Y, which has played out in the news. To address confusion, “on Feb. 3, the Treasury Department announced that buyers would be able to tell if a vehicle qualifies as a station wagon or SUV based on information that’s already on its window sticker.” This is because the type of vehicle determines the maximum purchase price to qualify for the tax credit. Read more on this from Consumer Reports.
Clean Energy Tax Credit for Homeowners
Have you considered adding solar panels or making other energy-efficient upgrades to your house? Now might be the time to do it.
The Inflation Reduction Act provides credits to offset a portion of the cost of making clean energy improvements to your home. This includes installing solar panels or energy-efficient HVAC systems, water heaters, heat pumps, etc.
Lower Payments for Prescription Drugs
In addition to other changes to Medicare this year, the Inflation Reduction Act includes several improvements for Medicare.
Now, Medicare can negotiate with drug companies to get better costs for prescription medication – good news for seniors since it will lower drug costs. Specific examples of these improvements include insulin being capped at $35 per month and a yearly out-of-pocket cap for prescriptions of just $2,000 starting in 2025.
Make it in America
Provisions within the Inflation Reduction Act encourage the development, production, and use of American-made equipment for clean energy production by providing expanded clean energy tax credits for wind, solar, nuclear, clean hydrogen, clean fuels, and carbon capture.
In addition to the direct benefits of increased energy efficiency, this will spur American jobs in these areas and encourage domestic sourcing of the steel required to make the equipment, for example. One of the goals is to boost employment throughout the supply chain, creating good-paying job opportunities and improving the American economy.
Beefing Up The IRS
The Inflation Reduction Act also gives the IRS a makeover or at least more money to work with – nearly $80 billion over the next 10 years. Over half of that money will be spent to help the IRS enforce tax compliance on corporations and ultra-wealthy individuals, which is expected to increase tax revenues.
The rest is allocated toward improving other areas like customer service and operations.
What These Changes Mean For You
As with any new regulation that affects your finances, it creates planning opportunities if you are attentive. Considering the incentives provided, it could make sense to make some moves now that may not have been as beneficial before.
If you have been considering green purchases like buying an electric vehicle or putting solar panels on your home, you may have access to new tax credits that make these smart moves.
If you retired early, or are considering it, the extended premium tax credits could mean the difference between accessing affordable healthcare or working a little longer.
Whatever your situation, we are here to help you get as much value as you can from the changes brought by the Inflation Reduction Act.