Insights for Your Journey

President Biden signed the Inflation Reduction Act of 2022 into law on August 16 and includes notable changes to corporate taxes, Medicare prescription drug prices, and tax credits for clean energy and electric vehicles. Forbes notes that, because many of the provisions don’t take effect for a few years, economists don’t expect the bill to have much impact on inflation, and should really be considered a slimmed down Build Back Better plan. Here’s an overview of the bill’s purpose, major provisions, and how it could affect you.

 

Major provisions of the Inflation Reduction Act of 2022

The major goals of this bill are to invest in healthcare, reduce Medicare prescription drug spending, combat climate change, and reduce the national deficit. The Biden administration expects the bill to raise $737 billion in revenue, require $437 billion in spending, and reduce the federal deficit by $300 billion over the next 10 years. Here are its major provisions:

  1. Creates 15% minimum corporate tax. This new minimum tax rate applies to corporations earning more than $1 billion per year and is expected to raise $222 billion. It also adds a 1% tax on corporate stock buybacks, expected to add another $52 billion in revenue.
  2. Allows Medicare to negotiate prescription drug prices. This is expected to save $265 billion in Medicare costs. Starting in 2025, Medicare recipients will have their out-of-pocket prescription costs capped at $2,000.
  3. Adds $80 billion to fund IRS enforcement efforts. This will hire new IRS workers and is expected to add $124 billion in tax revenue.
  4. Extends the Affordable Care Act (Obamacare) subsidies. This extends funding for those with subsidized healthcare through the ACA until 2025, protecting coverage for 3 million people.
  5. Invests in “energy security and climate change” efforts. The bill targets a 40% reduction in carbon emissions by 2030 by incentivizing companies to shift toward clean energy and invest in clean energy-related technology.
  6. Tax credits for electric vehicles and clean energy home upgrades. US homeowners can receive up to a 30% tax credit for adding upgrades including rooftop solar panels and heat pumps. You’ll also get and tax credits of up to $7,500 when purchasing a new electric vehicle or $4,000 for a qualifying used vehicle.

 

The Act will have little impact on most Americans

The impact on inflation is expected to be minimal in the short run because most of the cost saving or revenue raising measures don’t take effect right away. The Federal Reserve’s actions are likely to have a far greater impact on rising costs.

Tax increases focus on large corporations, not individual consumers, so you’re not likely to feel this in your budget unless you own a Fortune 500 company. However, the increase in IRS enforcement could mean a higher chance of getting audited if your income exceeds $400,000 or you have a complex tax situation.

Electric vehicles and clean energy tax credits will most directly benefit you if you’re considering solar panels, heat pumps, or that new Tesla. These come with tighter restrictions this time around, however, so fewer vehicles and families will qualify. To be eligible for the tax credit, the following requirements must be met:

  • Final assembly of the vehicle must be in the US
  • Battery material must be sourced from North America
  • Cars up to $55,000 and SUVs, trucks, and vans up to $80,000 will be eligible
  • Single filers must earn less than $150,000 and joint filers less than $300,000

If you’re the average US consumer, the Inflation Reduction Act of 2022 won’t have much impact on your day-to-day life or finances. From an investment perspective, while some healthcare and clean energy companies could see a boost, we don’t see anything here that should change your long-term investment or financial plan.

Alterra Advisors - Josh Whelan

Ryan Colis

CFA, CFP®
Partner, Financial Advisor

About the Author

Ryan is a problem solver. He has a distinct ability to create a simple solution for very complex puzzles. So, naturally, he’s an integral part of our team. His favorite part of his role at Alterra is the analysis – whether analyzing a financial plan or reviewing an investment portfolio. However, the profession allows him to share that passion with clients by helping them navigate financial complexities as they collaborate on achieving their personal and financial goals.

After completing his undergraduate degree in Business Management, Ryan and Grant met by chance, developed a rapport and have been working together ever since. Ryan has continued his formal training in finance by earning his CFP and CFA designations.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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