The Inflation Reduction Act of 2022, how will it affect you?

On August 12, 2022, The House passed the Inflation Reduction Act of 2022 (as passed by the Senate on August 7, 2022). The Congressional Budget Office (CBO) projected the bill will produce an estimated $700 billion in total revenue over the next few years. The bill is now with president Biden and will be signed in the upcoming days.

A successor to the House-passed Build Back Better Act of late 2021, this act has been touted by President Biden too, among other things, help reduce the country’s crippling inflation by addressing the following key areas:

1. Reducing the federal deficit
2. Promoting the manufacturing of goods/services in the renewable energy sector
3. Reducing the high cost of prescription drugs and an extension enhanced health care premium tax credits.

However, several questions are looming over the effects of The Inflation Reduction Act of 2022 which we have tried to explain here.

Unless otherwise noted, the act will become effective beginning December 31, 2022. More specifically, the Act is likely to bring the following policy changes:

Extension of expanded ACA subsidies.

Extending the temporary expansion of Premium Tax Credits through 2025 (which was scheduled to expire at the end of 2022 under current law).

Climate and energy provisions.

Includes tax rebates and credits to lower energy costs for households; tax credits, research, loans, and grants to increase domestic manufacturing capacity for wind turbines, solar panels, batteries, and other essential components of clean energy production and storage; tax credits to reduce carbon emissions; programs to reduce the environmental impact of agriculture; a new fee on methane emissions; and more.

Minimum tax on corporations’ book income.

Creates a new 15 percent corporate alternative minimum tax based on the financial statement income of corporations with at least $1 billion in such income. Allows for bonus and accelerated depreciation deductions when calculating taxable book income.

Tax on share repurchases.

Imposes a new 1 percent tax on corporations’ net repurchase of stock.

Extension of excess noncorporate losses limitation.

Extends the limitation on the deduction of pass-through losses through the tax year 2028, which under current law is scheduled to expire at the end of 2026. The maximum deductible loss indexed to inflation is $540,000 for married taxpayers in 2022.

Prescription drug price reforms.

Allows Medicare to negotiate the price of certain prescription drugs; limits the price growth of certain drugs paid covered under Medicare to inflation; repeals the implementation of a “rebate rule” scheduled to increase drug-related Medicare outlays beginning in 2027; redesigns Medicare Part D benefit formula and caps out-of-pocket costs for beneficiaries.

IRS funding.

Appropriates approximately $80 billion over the next decade for IRS enforcement activities including the hiring and training new auditors, IT systems modernization, and taxpayer services.

Economic Effects

Reducing the federal deficit

The bill suggests a 15% minimum tax for corporations generating $1 billion or more in profit, which is projected to produce over $300 billion in tax revenue which will be used to cover the costs of heightened spending on climate and healthcare.

The bill would decrease long-run American incomes or GNP (gross national product by less than 0.05 percent).

An estimated $224 billion reduction in the deficit (including interest payments) is expected during the first decade and continues to reduce deficits thereafter, leading to a decrease in payments to foreign owners of the national debt and a 0.1 percent increase in the long-run GNP.

Revenue Effects

Promoting the manufacturing of products/services in the renewable energy sector

Over $300 billion will be invested in energy and climate amendments, the biggest federal clean energy investment in U.S. history. This part of the bill will focus on transportation and electricity generation with $60 billion set aside for nurturing renewable energy infrastructure in manufacturing like solar panels and wind turbines.

The bill offers a 10-year extension of the homeowner credit for solar projects, such as rooftop solar panels. That tax credit will also benefit individuals who purchase energy-efficient water heaters, heat pumps, and HVAC systems.

From 2024 buyers of EV cars will be able to get tax credits at the time of purchase of the vehicle rather than waiting till tax time to realize the benefit.

Current tax credits for purchasing a new or used electric vehicle will be continued for the next 10 years—until December 2032.

The bill includes about $676 billion in gross revenue raisers, comprised of about $213 billion in corporate tax increases, $54 billion in individual tax increases, $130 billion net from additional IRS tax enforcement, $278 billion from the drug pricing provisions, and about $1.1 billion in net revenue from items scored by the Joint Committee on Taxation (JCT).

Over the next 10 years, the Inflation Reduction Act is estimated to raise about $385 billion in conventional revenue and about $361 billion dynamically after accounting for economic impacts.

Distributional Effects

Reducing the high cost of prescription drugs and extending enhanced health care premium tax credits

The Inflation Reduction Act will extend the Affordable Care Act (ACA) program to 2025, to assist eligible individuals and families who buy their health insurance from the Health Insurance Marketplace to keep benefiting from lower health care premiums.

For the first time, the federal health secretary will get to negotiate the cost of certain expensive medicines each year for Medicare.

The healthcare subsidies in the Affordable Care Act will be extended for another three years keeping premiums to $10 per month or lower for most of the people covered through the federal health insurance exchange.

Over the long run, the Inflation Reduction Act would raise marginal income tax rates faced by higher earners and corporations. The distributional results that follow do not include the impact of drug pricing provisions or IRS enforcement on after-tax incomes.

In addition to the points mentioned above the Inflation Reduction Act will also have the following effects:

• Expands Medicare benefits
• Lowers energy bills
• Makes historic climate investment
• Lowers health care costs
• Creates manufacturing jobs
• Invests in disadvantaged communities
• Closes tax loopholes used by wealthy
• Protects families and small businesses earning $400,000 or less

It’s important to consider that the points mentioned above will only become effective once the bill is signed and enacted as law. Tax policies for individuals and corporations will be affected by this bill so be sure to keep up to date with any new developments.

To know about all the upcoming changes and how they impact you, register for The Inflation Reduction Act and Taxes: What You Should Know webinar.

This CE/CPE webinar will cover tax-related changes and also other important aspects of the bill. Also, we shall discuss other current tax topics such as Form 7203.