PRW News

Inflation Reduction Act

Biden’s “Build Back Better” Bill has passed as the Build Back Good Enough “Inflation Reduction Act”

 

On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. At a cost of $430 billion, it is a mere shadow of its predecessor, the Build Back Better Bill (BBBB) introduced in 2021 at a cost of $2.15 trillion. The paring down of items in the IRA was agreed to in order to garner the key votes of several members of the Senate.[1] The focus of the IRA is reducing climate change, lowering health care costs and increasing funding for the IRS to pursue wealthy individual and corporate tax evaders.

 

The health care spending provisions include Affordable Care Act subsidies, prescription drug benefits and increased Medicare benefits. The climate related provisions include clean electricity credits, wind and solar tax credits, green energy credits and agricultural conservation incentives. The IRA is paid for by:

  • A repeal of the drug rebate regulations.
  • Drug price negotiations and limits on drug price increases.
  • A 15% corporate minimum tax on corporations with profits over $1 billion for 3 consecutive prior tax years, estimated to generate $222.2 billion over 10 years.
  • A 1% excise tax on stock repurchases, estimated to raise $ 73.7 billion over 10 years.
  • The extended active loss tax limitation at $52.8 billion of new revenue over 10 years.
  • IRS enforcement which is estimated to generate $124.1 billion over 10 years.[2]

 

Provisions missing in the IRA that were in the BBBB include the Child Tax Credit; paid family leave; immigration reform; and transportation spending. So, who benefits from the new law?

  • The climate initiatives will benefit green energy firms including electric car manufacturers and purchasers (subject to price and income caps) and homeowners who make energy-focused home upgrades.
  • The health care initiatives will benefit seniors with drug costs capped at $2,000 annually, especially benefitting seniors with costly illnesses and expensive drugs.
  • The IRS can now hire an estimated 87,000 new employees.
  • President Biden and the Democratic party benefits by passing sweeping legislation heading into the mid-term elections.

Our clients will likely benefit from the provisions that were stripped from the BBBB and not included in the IRA. These include the proposed Grantor Trust changes that would have disrupted most current and future estate planning, the proposed higher individual and capital gains tax rates, and the reduction of the lifetime gift and estate tax exemption. Hopefully we all benefit from the climate change provisions in the IRA. Extra care is advised, however, when filing individual and corporate tax returns due to the substantially increased IRS vigilance.

 

Unfortunately, many have opined that the impact the IRA will have on inflation will be modest at best. In fact, according to the Tax Foundation, the IRA will reduce the Gross Domestic Product (GDP) by a mere 0.2%. Generally, the larger the GDP, the higher the chance of increased inflation.[3]

 

What is next for Congress? Actions include bolstering US manufacturing to compete with China, tacking immigration reform, addressing behavioral health and improving responses to future pandemics.

 

The forgoing is intended to provide a 30,000-foot summary of the IRA. We welcome questions about the specific provisions, especially as they may relate to the client’s individual circumstances.

 

The foregoing is for information purposes only. PRW Wealth Management, LLC does not provide legal or tax advice. Clients should always consult their attorney and accountant about their individual circumstances. PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. Life insurance products are offered through PRW Associates Insurance Agency, Inc.

[1] PRW Wealth Management “Reconciliation Bill 2.0: The Democrat’s Inflation Reduction Bill,” August 9, 2022.

[2]Congressional Budget Office, “Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022; Senate Democrat Summary Chart of August 10, 2022.

[3] Tax Foundation, “Details and Analysis of the Senate Inflation Reduction Act Tax Provisions,” August 10, 2022.

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