Sunday’s passage of the Inflation Reduction Act of 2022 (IRA) by the U.S. Senate clears the way for a swift review of the amended Act by the House before it heads to the White House. The effect it will have on inflation is the subject of many debates, but it will have a substantial impact on many Americans, regardless.
The IRA’s biggest headlines focus on the $369 billion spending on climate and energy initiatives and various healthcare premiums, caps, and costs. Paying for these programs involves the addition of a 15% minimum federal tax on corporate income for billion-dollar companies and a recently added 1% excise tax on corporate stock buybacks.
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How the IRA 2022 Affects You
The Inflation Reduction Act’s focus on large companies and climate initiatives may seem distant for many individuals, but the trickle-down effect of additional green investment opportunities, changes companies will make to reduce the impact of their new taxes, and the healthcare premium and cost caps will impact day-to-day spending activities and long-term decision making.
Inflation Reduction Act Expected Impacts
While we’re on the cusp of IRA 2022 becoming law— likely within a few weeks—your planning should begin now.
- Healthcare Costs – The extension the Affordable Care Act’s healthcare premium subsidies will make insurance costs more affordable for small businesses and independent contractors. While helpful to many, businesses should be aware that talent retention may continue to be a challenge as this makes it easier for individuals to leave the traditional workforce.
- Tax Enforcement – An additional $80 billion is being allocated to the Internal Revenue Service to aid collections for taxpayer compliance. Individuals and businesses who owe back taxes or need assistance resolving their tax matters should work to resolve them now before stronger enforcement practices are implemented.
- Corporate Stock Buybacks – The addition of a 1% excise tax for stock buybacks will impact the billions of dollars that companies use to control the volume of stock in the marketplace, affecting both their share price and dividends. Organizations may shift to issuing more dividends to their shareholders or use the funds to increase their capital assets, ultimately affecting investor compensation.
- ESG Investments (environmental, social, and governance) – Clean energy tax breaks, shifts to U.S.-made batteries, and reforestation funds in the IRA will all contribute to opportunities for individuals and companies to make either direct purchases in ESG supportive products and services or to invest their monies into the funds, companies, and other beneficiaries of the IRA Act.
Other Notable Impacts
The Inflation Reduction Act also directs funds and organizational practices to work toward addressing healthcare and clean energy alternatives.
- A $35 cap on insulin prices will help the 37 million individuals with diabetes to control their costs.
- Medicare will be able to able to negotiate drug prices. This is limited to 10 drugs starting in 2026. The savings to taxpayers and the patients using those medications should be significant but until the 10 drugs are chosen, the individuals who will benefit most is unknown.
- A $2,000 cap on prescription spending will help those on Medicare who have intensive or costly drug therapies.
- The $7,500 income tax credit for purchases of new electric vehicles (EV) will continue to be offered.
- A new $4,000 income tax credit will be available for purchases of used electric vehicles.
- Both EV credits have the vehicle purchase amounts capped at $55,000 for cars and $80,000 for trucks and vans.
The vehicle purchase amount caps will exempt most of the Tesla and other EV car makers vehicles from the program and may encourage automakers to speed lower cost EVs to the market. Available tax credits may continue to be limited each car manufacturer.
We Welcome Your Questions
REDW’s trusted tax advisors provide the information needed for you to confidently make sound financial decisions. If you or your business may be affected by the Inflation Reduction Act, contact REDW Principal and Tax Practice Leader Christina C. Roderick, CPA, MST, CGMA, below to start a conversation.