This week, Gabe Adams, CFP®, MSPFP, discusses two important recent developments in Washington: passage of the Inflation Reduction Act and the President’s recent announcement on student loan forgiveness.
Welcome to the weekly market update. There’s a lot going on in the market and the economy as Ramesh highlighted last week, but today I’m going to shift gears and talk about some important developments in Washington. The Inflation Reduction Act, or IRA, was recently signed into law. I’ll avoid the acronym, which as many of you may know is quite common in the financial world and bound to confuse people, myself included. I’ll also touch on the President’s announcement on Wednesday on student loan forgiveness. Let’s start by looking broadly at key tax, energy, and healthcare provisions in the inflation reduction act.
After lots of worry in 2021 about potential sweeping changes to tax rates across the board, there frankly isn’t a lot in this bill from a tax standpoint. First off, a 15% minimum tax will be instituted for corporations making $1 billion or more in income. Second, a 1% excise tax on stock buybacks will be implemented starting in 2023.
Another item of importance on the tax side involves IRS funding. The bill allocates $80 billion to the IRS over the next 10 years. More than half of this total will focus on bringing enforcement back closer to historical norms on higher earners, as audits have plunged over the last several years. Funds will also be directed towards improving IRS operations. And if you’ve ever called the IRS, hopefully that means shorter wait times.
Perhaps the most substantial changes involve incentives and tax credits focusing on clean energy. For starters, the bill offers elective vehicle, or EV, tax credits of up to $7,500 on new vehicles. There are restrictions, as the EV must be made in North America and there is a price cap of $55,000 on sedans and $80,000 on SUV’s and trucks. Income of limits of $150,000 for individuals and $300,000 for married couples apply. There is also up to a $4,000 credit on the purchase of a used EV or 30% off the purchase price, whichever is lower. Income limits for used EV’s are $75,000 for individuals and $150,000 for married couples. Most of these changes are effective starting in 2023.
Another provision includes a credit for residential clean energy costs. With that, solar, heat pumps, and small wind energy systems would be eligible for a 30% credit through 2032. Like the EV credits, there is a lot of fine print and restrictions, and certain home projects are eligible for credits up to specific limits. That said, we strongly recommend you ask the provider specifically if your purchase is eligible for Inflation Reduction Act credits.
For businesses, several investments, low carbon and clean energy practices are also rewarded with a variety of tax credits and other incentives. For example, tax credits are available for energy efficient buildings. Additionally, businesses can receive tax credits for qualified investments in clean energy such as nuclear, hydrogen, and carbon capture technology.
Now, there are some key healthcare provisions in the bill on Medicare and the Affordable Care Act. As far as Medicare, there are some important changes to be aware of regarding part D, or prescription drug coverage, that are phased in over time. Starting in 2023, pharmaceutical companies are required to rebate customers if drug prices rise faster than inflation. In 2023, part D will introduce an annual $2,000 cap on out-of-pocket drug costs. Then starting in 2026, Medicare will phase in negotiated prices for certain prescription drugs, with the intent to lower prices on those drugs for Medicare enrollees.
As you may remember, there was significant legislation implemented through COVID relief packages over the last couple of years. One piece of legislation created enhanced Affordable Care Act credits to provide premium assistance to individuals and families who were affected by the pandemic. Broadly, the new legislation extends the premium credits through the end of 2025 for healthcare policies purchased through a state-run exchange.
Now, let’s pivot to student loan forgiveness. Up to $10k is being forgiven for borrowers, with that number increasing to $20k if you received a Pell Grant. To receive loan forgiveness, your income must fall under $125k for individuals and $250k for married couples. Loan forgiveness applies to Federal student loans only. Along with some other announcements, the pause on Federal student loan payments was extended through the end of 2022.
So, what does it all mean? There’s not a whole lot to speak of in the Inflation Reduction Act as far as tax planning. There are a few corporate tax changes, but little from a personal financial planning perspective. The meatiest part of the bill perhaps involves energy incentives and investments. If you were thinking about a clean energy upgrade for your home or an electric vehicle purchase, you may be eligible for a tax credit. However, with all the stipulations and restrictions, be sure to read the fine print. If you’re not sure if you’re eligible for a credit, it’s not a bad idea to ask the provider directly. For those on Medicare part D, the bill should mostly be good news that could lower your future out of pocket prescription drug costs. For those who are enrolled in a plan in the public marketplace, you have until 2025 to potentially take advantage of enhanced credits.
On student loans, if you or a family member has outstanding Federal student loans, you could receive some immediate relief. Legal challenges to student loan forgiveness may arise, but take advantage of this opportunity if possible. If the Department of Ed. has your income information on file, your debt may be cancelled automatically. However, some borrowers will have to submit an income verification application. If you’re not sure what to do, it’s not a bad idea to call your loan servicer.
As always, don’t hesitate to contact your Wealth Manager if you have any questions. Thanks for listening in, and please join us next time for the weekly market update.