Inflation Reduction Act: What You Need to Know as You Look Toward the Future
It’s official. The Inflation Reduction Act was passed by Congress and officially signed into law on August 16. If you’re wondering how legislation in Congress could possibly affect inflation or other aspects of your financial plan, don’t worry we’ve got you covered. Here are our key takeaways about the Inflation Reduction Act and how it could affect you.
What Is the Inflation Reduction Act?
The Inflation Reduction Act is a revision of the social spending part of the earlier Build Back Better Act. It covers a range of issues that span from energy and climate reform to healthcare subsidies and tax provisions.
How Will It Affect Your Finances?
Below is an overview of the proposed changes. For more detailed information, please refer to the full text of the bill here.
Individuals
- The limitation on pass-through business losses outlined in the Tax Cuts and Jobs Act (TCJA) will be extended through 2028, it was previously scheduled to end on December 31, 2025. This provision limits the amount of net operating losses that can be taken against income to 80% of taxable income.
- Extends and expands upon the health insurance premium tax credits enacted in the American Rescue Plan Act (ARPA) through the end of 2025. This will allow higher-income households to qualify for the credits and expand the subsidies available for lower-income households.
- Creates and extends several tax credits for green energy and other climate-related efforts, including tax credits for buying electric vehicles and making homes more energy-efficient.
- Ensures that Medicare recipients who need prescription drugs will pay a maximum of $2,000 in out-of-pocket expenses annually starting in 2025.
Businesses
- Creates a new 15% minimum tax for corporations with income over $1 billion starting in 2023.
- Imposes a 1% excise tax on the value of stock repurchases during the taxable year effective January 1, 2023. This does not include stock that is contributed to retirement accounts, pension plans, or employee stock ownership plans (ESOPs).
- The research and development tax credit for small businesses will be increased by $250,000. This credit can be claimed against payroll taxes.
Other Provisions to Keep in Mind
- Invests $80 billion over 10 years in IRS enforcement funding with the goal of increasing the efficacy of tax-collection efforts.
- Creates a 95% excise tax penalty on drug manufacturers in an effort to lower drug prices.
- Increases the Superfund Tax on crude oil and imported petroleum to 16.4 cents per barrel. Also increases other taxes and fees on the use of fossil fuels.
Will It Reduce Inflation?
Despite its name, the Inflation Reduction Act has no clear inflation-related provisions. Many of the bill’s components are tangentially related and could influence the levers that affect inflation, like supply and demand. However, the overall impact of the bill is more likely to be felt over the long term and it is not considered an immediate fix.[1]
The hope is that by lowering the deficit and improving energy and healthcare costs for families, the bill can help fight persistent inflation over the next several years. The Congressional Budget Office has estimated that enacting this legislation would reduce the national deficit by $102 billion over the 2022-2031 period,[2] but has also stated that the bill would have a “negligible effect on inflation” in the rest of 2022 as well as 2023.[3]
Still Have Questions?
The net-inflation impact of the Inflation Reduction Act remains to be seen, but that doesn’t mean there aren’t clear steps you can take today to help improve your financial security. If you have questions or concerns about your financial plan and how it may be impacted by this bill, please reach out to us for a review. At ACP, we are dedicated to keeping out clients up to date on all of the latest legislative changes. To learn more about how we can help, sign up for our newsletter or schedule a complimentary call today!
Disclosures: Aviance Capital Partners, LLC (“ACP”) is an SEC registered investment adviser located in Naples, Florida. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that ACP has attained a certain level of skill, training, or ability. While information presented is believed to be factual and up-to-date, ACP does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of ACP as of the date of publication and are subject to change. Not all services will be appropriate or necessary for all clients, and the potential value and benefit of the ACP’s services will vary based upon the client’s individual investment, financial, and tax circumstances. The effectiveness and potential success of a tax strategy, investment strategy, and financial plan depends on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions. This should not be construed as specific investment, financial planning or tax advice tailored to an individual reader. ACP suggests that readers consult a financial professional, attorney or tax advisory professional about their specific financial, legal or tax situation. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by ACP, will be profitable or equal any historical performance level. Additional information about ACP, including its Form ADV Part 2A describing its services, fees, and applicable conflicts of interest and its Form CRS is available upon request and at https://adviserinfo.sec.gov/firm/summary/146597. For current ACP clients, please advise us promptly in writing, if there are ever any changes in your financial situation or investment objectives, if you wish to impose any reasonable restrictions to our management of your account, or if you have not been receiving at least quarterly account statements from your account custodian.
[1] The Inflation Reduction Act: What the bill will actually mean for inflation: NPR
[2] Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022 | Congressional Budget Office (cbo.gov)
[3] CBO: Inflation Reduction Act ‘Would Have a Negligible Effect on Inflation’ | CNSNews
