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Consequences of The Inflation Reduction Act

August 23, 2022 | Posted in: Insights, Wealth Strategies

The Inflation Reduction Act (“Act”) was passed by the Senate on August 7th, the House on August 12th, and signed into law by President Joe Biden on August 16th. This bill enacts some of the provisions from the Build Back Better Act, but excludes many that would have had an outsized impact on individuals. The resulting bill is smaller than its earlier version, but contains several significant provisions for healthcare, the environment, and taxes. The bill came together and passed due to a compromise in spending that leaves the bill projected to reduce the deficit by approximately $275 billion over the next ten years.

For healthcare, the Act extends subsidies for the Affordable Care Act for the next three years and increases Medicare prescription drug benefits. It pays for these items by repealing regulation on prescription drug rebates and allowing Medicare to negotiate prescription drug prices for certain drugs. It also sets limits on certain drug price increases.

The majority of the spending in the bill is related to the environmental provisions, which focus on various measures to fight climate change. These include certain clean manufacturing incentives, credits for wind, solar, and nuclear power, and several clean energy rebates and incentives. It also includes provisions for agricultural and forest conservation, drought resistance, and fire prevention efforts.

In terms of revenue raisers, the primary items remaining in the bill are:

• A 15% corporate minimum tax
• Taxing carried interest as ordinary income, though some exceptions remain
• A 1% excise tax on stock buybacks, starting in 2023
• Increased budget for the IRS for tax enforcement

It is important to remember that significant portions of the Build Back Better Act that were not included are:

• No increase to the ordinary income tax rate at the top brackets
• No elimination of the step-up in income tax basis at death
• No expansion of the net investment income tax to passthrough entities
• No roll back of the $10,000 SALT cap
• No changes to the grantor trust rules or estate, gift, and generation-skipping transfer tax exemptions

The overall effect of the tax provisions in the bill are minor for most individuals, with more changes impacting corporate taxation. For those individuals with significant carried interest, contact your advisor or CPA to discuss how the provisions in the bill may affect your taxes in the coming years. For the most part, this version of the bill represents a sigh of relief for wealthy families. Larger fundamental changes were avoided, and existing estate and tax planning structures should need little or no changes. However, given the additional funding for the IRS, audit rates are likely to rise, but will also likely not catch up to the massive drop in audits that has occurred since 2010.

Please reach out to us if you have questions or would like to discuss the bill further.