How the Inflation Reduction Act may help you

On Aug. 16, President Joe Biden signed the Inflation Reduction Act (IRA) (H.R 5376) into law. While addressing inflation in several ways, such as imposing a minimum corporate income tax, the law’s ambition includes a gamut of other critical issues, from drug costs and Medicare to electric cars, tax savings, and funding to catch tax violators and protect federal lands.

One of the possible provisions that will reduce inflation is requiring companies making more than $1 billion to have a minimum tax of 15%. These revenues are estimated to reduce the deficit by $300 billion over the next decade.

For individual taxpayers, the law provides numerous means to save taxes, from credits for purchasing new or used electric cars to energy-efficient home appliances. But most importantly, in his signing statement, Biden said, “No one — let me emphasize — no one earning less than $400,000 a year will pay a penny more in federal taxes.”

Health and Medicare costs and actions to address climate change are the principal focuses of the new law. About half of the estimated $700 billion cost is directed toward energy savings and clean energy production.

But for many Americans, particularly the elderly and low income, the immediate pocketbook effect will be lower medical costs or access to medical coverage.

Medicare

The IRA extends insurance subsidies for the Affordable Care Act (“Obamacare”) policies. These were begun in 2021 and set to expire at the end of 2022. This law extends the support for another three years.

Earlier this summer, Covered California estimated that 220,000 Californians might have to forego health insurance if these subsidies were not continued. The extension may also reduce Covered Cal’s proposed 2023 average premium increase from 6% to 5%, according to its July press release.

Health insurance premiums will be limited to 8.5% of a family’s income for those making four times the poverty level. This could amount to an annual savings of $800.

For individuals who have Medicare Part D (drug coverage), the annual costs will now be capped at $2,000 beginning in 2025. For those who need insulin, monthly costs will now be capped at $35.

Placing a limit on out-of-pocket drug spending under Medicare Part D will be especially helpful for beneficiaries who take high-priced drugs for conditions such as cancer or multiple sclerosis.

Also, Part D catastrophic cost-sharing coverage will be eliminated in 2024.

Another Part D change is expanded coverage of vaccines beginning next year, 2023. For vaccines that the Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices approve for adults, copayments will be eliminated.

According to AARP, “This will be important relief for Medicare Part D-covered vaccines that currently require cost-sharing, such as shingles.”

Future prescription savings will occur now that Medicare is allowed to negotiate drug prices with pharmaceutical companies. The drugs subject to negotiated prices will be limited to those without generic or similar competition already covered under Medicare. In 2026, Medicare can begin negotiating prices for 10 Part D drugs, 15 in 2027 and in 2028. Part B drugs without generic competition also are eligible for negotiation.

The Centers for Medicare and Medicaid Services will not have to originate a process nor enter drug negotiations as novices since the Department of Veterans Affairs already negotiates drug prices. So, there are already contractors and government officials who have expertise in this area.

Energy Improvements

When the IRA’s details were released, Resources for Future estimated that, “The average household will experience approximately $170-$220 in annual savings from smaller electricity bills and reductions in the costs of goods and services over the next decade.”

The law’s energy provisions provide many mays for climate help and pollution reduction — clean energy tax credits, a production tax credit and investment tax credits for solar, wind and storage projects.

The law’s provisions would result in reduced emissions: “2030 electricity sector emissions are projected to drop from 70% to 75% below 2005 levels, compared to 48.5% below 2005 levels without the policy.”

For example, tax credits for purchasing electric vehicles will be extended and increased. Individuals who buy a new electric vehicle might have a tax credit of $7,500 and $4,000 if the vehicle is used. The buyer’s income and vehicle cost will affect the amount of the credit.

Other tax credits and rebates will be available for home improvement projects from energy-saving water heaters, heat pumps and HVAC systems to installing solar panels.

“It’s going to offer working families thousands of dollars in savings by providing them rebates to buy new and efficient appliances, weatherize their homes, get tax credit for purchasing heat pumps and rooftop solar, electric stoves, ovens, dryers,” Biden stated.

The IRA extends and enhances two existing tax credits for energy-efficient home improvements. These might include installing new, energy-efficient windows, doors, water heaters, furnaces or air conditioners.

The Nonbusiness Energy Property Credit expired at the end of 2021, but the Inflation Reduction Act extends it. In 2023, the Energy Efficient Home Improvement Credit will increase from 10% to 30% and the annual tax savings limit will increase from $500 to $1,200.

The Residential Energy Efficient Property Credit is the second current credit to be revised. Now to be known as the Residential Clean Energy Credit, the credit is now extended for 10 years through 2034.

The credit is worth 26% of the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home. It was scheduled to fall to 23% next year and expire in 2024.

The IRA extends and increases the credit to 30% from 2022 to 2032. It then falls to 26% in 2033 and 22% in 2034, and then will expire.

The IRA also offers rebates to low- and middle-income families who purchase energy-efficient electric appliances, such as stoves, ovens, ranges or even a heat pump clothes dryer. Equipment that produces more energy-efficient usage is also eligible for rebates. This includes a heat pump for a water heater, space heating or cooling.

Also rebates are offered for non-appliance purchases such as insulation, electric wiring or others. To qualify for a rebate, a family’s total annual income must be less than 150% of the median income where they live.

And there are $10 billion worth of tax credits for constructing clean technology manufacturing facilities,

Other provisions

The 273-page bill includes a variety of other provisions, such as added funding for many federal programs and more tax credits and rebates.

The bill provides $80 billion to increase and to improve the Internal Revenue Service’s (IRS) operations, such as enforcement, operations support, business system modernization and taxpayer services. This money will be available through 2031.

IRS Commissioner Chuck Rettig commented, “During the next 10 years, these funds will help us in many areas, including adding critical resources to not just close the tax gap but meaningfully improve taxpayer service and technology. This will allow the IRS to provide services to taxpayers in the manner they expect and deserve … Given the scope of the bill, keep in mind these changes will not be immediate. It’s a 10-year plan, and it will take time to put these provisions into place.”

The federal government will increase its auctions of land for oil drilling. There are tax credits for coal and gas-burning plants that rely on carbon capture technology.

And $2.15 billion is appropriated to the U.S. Forest Service for hazardous fuels reduction projects in the wildland-urban interface, vegetation management projects, environmental reviews and protection of old-growth forests. Another $1.5 billion is available for tree planting.