This was just signed into law 8.17.22 so it is still being digested, but we wanted to send you a quick summary of what it entails. First off, it is comical that it is called the Inflation Reduction Act. Seems to be an effort to get support for something everyone could agree on needing (reducing inflation), but the proof is largely absent from the pudding.
What is clear is that from a tax standpoint, this is a considerably less cumbersome bill than the original Build Back Better bill which would have impacted individuals and corporations in a much greater way. As Brian Wesbury, Chief Economist of First Trust, says: “What is important to keep in mind is that it could have been worse… much, much worse.” Taxes were originally set to raise the top rate to 39.6%, and tax long term capital gains and dividends at this same rate 39.6%--doubling where it caps out currently. Also, on the table was eliminating the step up in basis at death, and raising the corporate tax rate to 28%. None of this happened. Always good to have perspective for what this situation could have looked like.
Here are the main components of what passed this month:
- 15% minimum tax on the book profits on corporations: Corporations with at least 1B in income will have to pay this new tax.
- 1% tax on stock buy-backs by corporations
- IRS enforcement: Adds $80B over the next 10 years to IRS needs and goals of cracking down.
- Affordable Care Act subsidy extension: The current subsidies the federal government uses to lower premiums were scheduled to expire at year end are now extended to 2025.
- Climate and energy tax credits & rebates (starting in 2023):
- Tax credits are available to those purchasing EV, upgrading solar, energy efficient windows, and installing heat pumps. The expired credit was 10% of costs, but there was a lifetime limit of $500 (and $200 lifetime limit for windows, $150 for furnaces, and $300 for air conditioning systems). Now, this bill raises that credit to 30%. The lifetime limit has been replaced with an annual limit of $1,200 and the window limit will go away. Specific limits include: $150 for home energy audits, $250 for exterior doors, $600 for windows, AC, electric panels, water heaters, furnaces, and $2,000 for heat pumps (for this category you can exceed the 1200 max.)
- For EV, the limit of $7,500 is extended for new, and the lesser of $4,000 or 30% of cost for used. There are income limits for the EV credit: must be below 300k joint ($150k single) MAGI. Also, the total cost for the van/truck/SUV must be less than $80k, cars must be less than $55k, and used must be less than $25k.
- Rebates are also available for “green” energy efficient appliances for low to middle income families. To qualify, your total family annual income must be less than 150% of the median income where you live, and the max rebate is limited to $14,000.
- Appliances: rebates of $840 for stove/oven/range, $1,750 for a heat pump water heater, and $8,000 for heat pump for heating/cooling
- Non-appliance upgrades: rebates for 1600 for insulation/ventilation, $2,500 for electric wiring, and $4,000 for electric load service center.
- Tax credits are available to those purchasing EV, upgrading solar, energy efficient windows, and installing heat pumps. The expired credit was 10% of costs, but there was a lifetime limit of $500 (and $200 lifetime limit for windows, $150 for furnaces, and $300 for air conditioning systems). Now, this bill raises that credit to 30%. The lifetime limit has been replaced with an annual limit of $1,200 and the window limit will go away. Specific limits include: $150 for home energy audits, $250 for exterior doors, $600 for windows, AC, electric panels, water heaters, furnaces, and $2,000 for heat pumps (for this category you can exceed the 1200 max.)
In summary, there are some things in here that will raise revenue for the government, but likely will have no ability to lower inflation. We might have stayed out of this bill if they hadn’t named it what they did, but as they did, we felt compelled to chime in. In fact, the Penn Wharton Budget Model (a non-partisan research organization at UPenn) said there is low confidence there will be any impact on inflation, and the Congressional Budget Office (federal agency providing economic information to Congress) said the bill will barely make a dent in inflation—and could even nudge it upward. Inflation has a long way to go, and this bill won’t help it get where it needs to. As we wrote just two weeks ago, it seems this is another example where the truth is abused and manipulated for an ulterior motive.
However, in looking at what this bill entails, we have survived much worse. The average person will not feel much effect, and while big corporations will, they are very skilled at figuring out ways to adapt.
Eric & Jeremy
"The views expressed are not necessarily the opinion of Commonwealth Financial Network. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed."