What’s in the Inflation Reduction Act?

Aug. 22, 2022

President Biden recently signed the Inflation Reduction Act (IRA) into law. The primary purpose of the bill is to combat climate change, the increasing costs of prescription drugs and health insurance, and provides additional funding for the IRS.  

The saying “after all is said and done, more is said than done” seems particularly fitting here. The final version of IRA has proven to be a very scaled-back version of Biden’s ambitious Build Back Better Act. While it doesn’t include many tax code changes that were floated in recent proposed bills, it still includes several provisions that we feel are worth highlighting:

Medicare Prescription Drug Costs: Starting in 2025, the Act places a $2,000 out-of-pocket cap on prescription drug costs for Medicare enrollees. Further, it allows the government to negotiate the prices of certain prescription drugs. In addition, it caps the price of insulin at $35 and drug price increases with the rate of inflation for Medicare enrollees.

ACA Insurance Premiums: For those enrolled in Affordable Care Act (ACA) health plans, the Act extends the expanded Premium Tax Credit for an additional three years, through 2025, which will help millions avoid unexpected spikes in their health insurance premiums. Health insurance costs are essentially capped at 8.5% of income for all ACA health care enrollees.

Climate Change Tax Credits: Restructures the existing tax credit for purchasing an electric vehicle and aims to lower the overall costs of making energy efficient improvements to your home.

IRS Funding: The Act contains $80 billion in additional funding for the IRS over the next 10 years, which may result in increased audits although, it’s been said, these audits will not target those making under $400,000 per year in keeping with the spirit of Biden’s campaign promise.

Corporate Profit Tax & Stock Buybacks: Finally, to help pay for the health care and climate measures, the Act introduces a 15% minimum tax on corporate profits over $1 billion and a 1% excise tax on stock buybacks taking effect in 2023, which may result in a rush of buybacks by some companies before the end of 2022.

A key takeaway from this new legislation is that for those who are concerned about the rising cost of health care, particularly those in or nearing retirement, the top two provisions summarized above take steps to keep expenses down. This can help reduce uncertainty and unexpected increases for many people facing meaningful health care expenses that represent a significant part of annual spending.

As always, we'll continue to monitor the stream of legislation coming from DC for potential impacts on your financial plan.

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