After weeks of negotiations, the Inflation Reduction Act (IRA) was passed in the Senate. The effects of this bill are aimed at reducing some of the burden of inflation in the longer-term. The bill hopes to achieve this with tactics such as lowering medical costs and lessening dependence on fossil fuels by incentivizing the purchase of electric vehicles—two necessary expenses that greatly affect Americans during times of heavy inflation. It is unlikely to cause a significant shift in the economy for several months.
Please note this is based on the current draft legislation. We will keep you updated if additional changes are made or when the legislation passes.
To summarize, here are parts of the bill that may affect you.
Lowered Medical Costs for Seniors
Under the bill, Medicare recipients will have a $2,000 cap on out-of-pocket prescription drug spending per year. This will take effect in 2025. There is no current cap in place.
Additionally, the act will empower Medicare to negotiate directly for the price of prescription drugs. However, the negotiations will only effect 10 major drugs through 2026 and increase to 20 drugs in 2029.
Corporate Minimum Tax
The Institute on Taxation and Economic Policy found in 2020 many large and profitable corporations paid no federal taxes. In an effort to correct this, the legislation creates a 15% minimum tax for corporations making $1 billion or more in income, which would result in more than $300 billion in tax revenue.
It is estimated 150 of the largest corporations would be subject to the new corporate minimum tax. Under the IRA, these corporations would pay 15% of the income they report to shareholders after certain adjustments or the amount they owe under the regular corporate tax—whichever is greater.
1% Excise Tax on Stock Buybacks
Currently, there is no tax on stock buybacks. This makes buybacks a popular alternative to the distribution of cash to shareholders when a company wants to boost their stock price by reducing the number of shares in the market.
With the IRA's proposed 1% excise tax on corporate stock buybacks, lawmakers are hoping to slow this practice and encourage the use of dividends. Instead of once a quarter, companies would have to report buybacks on the next business day and be required to disclose whether executives bought or sold stock within 10 business days of a buyback program being announced.
Expanded EV Tax Credits
With the passage of the IRA, more than $300 billion would be invested in energy and climate reform, making it the largest federal clean energy investment in U.S. history. One such measure includes the expansion of the EV tax credits.
Currently, the Electric Vehicle Tax Credit is worth up to $7,500 in the year an electric vehicle is purchased and only applies to new vehicles. If you qualify for the full amount of the credit, it can bring your tax owed to zero, but you are not eligible for a refund on your return. The amount you can receive is largely determined by the battery size and if it is a hybrid or full electric model. Additionally, the credits are limited to 200,000 qualifying purchases per automaker before the credits.
The IRA maintains the existing $7,500 consumer credit for the purchase of a qualified new clean vehicle, including electric vehicles, plug-in hybrids, and hydrogen fuel cell vehicles. But under the IRA, new EV buyers would be able to receive the credit as a discount at the time of sale, applying it as either a down payment or as a price reduction. The EV credit also sets income limits--$150,000 for single filers and $300,000 for families--as well as limits on the price of the vehicle of $80,000 for vans, trucks, and SUVs and $55,000 for all other models.
Additionally, the purchase of a used electric vehicle may be eligible for a rebate of either $4,000 or 30% of the vehicle's sale price, whichever is lower. The maximum price of the qualifying used EV is $25,000 and has an income limit of $75,000 for single filers and $150,000 for joint filers. The credit would continue for all qualifying electric vehicles until December 31, 2032.
Lower Consumer Energy Costs
The proposed bill provides various incentives to consumers to help relieve the high costs of energy and decrease utility bills. Along with the EV credits, the bill also includes:
- $9 billion in consumer home energy rebate programs, focused on low-income consumers, to electrify home appliances and for energy efficient retrofits.
- 10 years of consumer tax credits to help homes become more energy efficient and run on clean energy, making heat pumps, rooftop solar, electric HVAC and water heaters more affordable.
- $1 billion grant program to make affordable housing more energy efficient.
Additional IRS Funding
In addition to disruptions caused by the pandemic, budget cuts and outdated technology have bogged down the IRS. According to the IRS website, the IRS has six million unprocessed individual tax returns—up from the typical one million that we saw at this point in the year prior to the pandemic.
To address this issue, the proposed bill invests $80 billion in the nation’s tax agency over the next 10 years.
Of the total, $45 billion would be dedicated to tax enforcement activities such as providing legal and litigation support, conducting criminal investigations (including investing in investigative technology), providing digital asset monitoring and compliance activities, and enforcing criminal statutes related to violations of internal revenue laws and other financial crimes.
Additionally, the Inflation Reduction Act includes a provision that would require the IRS to provide a report on the cost of developing and running a free direct e-file tax return system, with a focus on multilingual and mobile-friendly features and safeguards for taxpayer data.
The Congressional Budget Office estimates this will result in an additional $204 billion in revenue over 10 years via improved tax compliance, for a net savings of $124 billion.
This is not an exhaustive list of measures in the proposed Inflation Reduction Act, which is likely to move through the House for passage this week and then to President Biden to be signed into law. If you have questions about these or any other parts of this bill and how they may impact your tax liability and budget, please reach out to your M&S Advisor to learn more.