Benefits of the Inflation Reduction Act

President Joe Biden signed the Inflation Reduction Act (IRA) into law in August.The bill is a reduced version of the administration’s Build Back Better plan. It aims to reduce health-care costs, fight climate change and shrink the deficit. New spending would be offset by new tax revenue and would reduce the deficit by $305 billion over the next 9 years. 

There were concerns with previously proposed bills that taxpayers would see their tax bill go up.  Tax revenue from the IRA will be raised by a 15% corporate minimum tax aimed at companies that earn more than $1 billion a year. There will be an excise tax on the repurchase of corporate stock, imposing a 1% surcharge on corporate stock buybacks.  Additional funding for the IRS will result in increased enforcement leading to less tax evasion, and therefore higher income tax revenue.

Changes to corporate taxation is effective starting Jan 1, 2023.  There are worries that the bill will reduce economic output in the long run and cause jobs to be eliminated. However, the White House indicates it will create clean energy jobs in each state. The core components of the bill are to reduce drugs prices, leading to a slight reduction in inflation, and dealing with climate change.

Energy Tax Credits

To encourage the switch to “green” energy, the IRA includes a number of provisions for both individuals and businesses.

Businesses can receive an energy property tax credit for up to 30% of the cost to switch to solar power and purchasing clean trucks or vans for commercial use. The owners of commercial buildings can also deduct up to $5.00 per square foot for making qualifying energy efficient upgrades. There does not appear to be a maximum business size to qualify for the credit.

For Individuals, the bill extends and modifies the phaseout of the Residential Clean Energy Tax Credit. Originally set to expire after 2023, the credit has been extended through 2034. The tax credit applies to residential investments that generated renewable energy, and now includes battery storage technology.

The phaseout has been modified and increased for years 2022 through 2034[1].

1. 30% for property placed in service after December 31, 2021, and before January 1, 2033
2. 26% for property placed in service after December 31, 2032, and before January 1, 2034
3. 22% for property placed in service after December 31, 2033, and before January 1, 2035

For example, the cost of a $30k rooftop solar system would be reduced to $21k after the 30% credit.  Additionally, it is projected homeowners could save $9,000 on their energy costs over the life of the system.

The Nonbusiness energy property credit originally expired at the end of 2021. It has been extended through 2032 and renamed the Energy Efficient Home Improvement Credit. This tax credit applies to items such as heating and cooling systems that make a home more energy efficient.  The credit is for 30% of the cost of the improvements made during the year, not to exceed $1,200.  There is an exception for heat pumps and biomass stoves which have a maximum $2,000 tax credit. 

Clean Vehicle Credit. Up to $7,500 in tax credits for new electric vehicles and $4,000 for used electric vehicles.  The vehicle must be placed in service by December 31, 2032. In addition to tax savings, studies suggests that those with electric vehicles could save up to $14,500 in fuel costs over the life of the vehicle.

Vehicles eligible for the credit include must be made by “qualified” manufacturers. The credit is not allowed for SUVs, vans, and pickup trucks with a manufacturer’s suggested retail price over $80,000, and $55,000 for other types of vehicles.

The credit is also not available to high income taxpayers. Single taxpayers with a modified adjusted gross income over $150,000 ($300,000 for married filing jointly) do not qualify.

Reducing Medical Costs

Lowering medical costs, especially for seniors on Medicare with fixed incomes, has been a concern for some time. Medical costs eat away at a good chunk of income for many seniors.

For those covered by Medicare Part D, the IRA will lower prescription drug prices starting in 2026 for certain prescription drugs. Starting in 2025 there will be an out-of-pocket annual cap of $2,000.  Insulin will be capped at $35 per month starting in 2023.  Additionally, all vaccines will be fully covered under Medicare Part D.

Affordable Care Act Subsidies Extended. Originally set to expire after 12-31-2022, the IRA extends the tax credit for health insurance premiums purchase through the exchange through the end of 2025. For the first time, the subsidies also include those with modified adjusted gross income (MAGI) above the 400% poverty line, expanding the credit to all marketplace consumers.

The changes mean those with income at 400% and above the poverty line will be capped at paying 8.5% of income towards premiums. The credit can either taken throughout the year and is paid directly to the insurer, or the credit can be taken when tax returns are filed.   

[1] https://www.congress.gov/bill/117th-congress/house-bill/5376/text