What’s Going on in Washington?

This summer Congress passed a healthy amount of legislation with the Inflation Reduction Act being the headliner in August. The bill cleared the Senate through the reconciliation process, enabling Democrats to proceed without any Republican support. The bill attained party-line votes of 51-50; Vice President Kamala Harris cast the tiebreaking vote. The bill cleared the House with party-line votes of 220-207.

The Inflation Reduction Act started out as the $3 trillion “Build Back Better Act” (or as some called it, the “Build Back Broke Act”). The newly titled $750 billion bill includes a number of major healthcare, energy, climate change, and tax provisions. By name, the legislation claims to target and reduce the ever-present inflation issue, but estimates show the bill likely won’t make a dent in the inflation rate. Nonetheless, there are many initiatives that you may want to be aware of in this significant piece of legislation.

I realize the title to this article could invite all sorts of opinions. Believe me, I’ve heard a lot of them! It’s a loaded question because of all of the day-to-day “noise” coming out of the country’s capital. But for the purpose of this article, what specifically is in the Inflation Reduction Act that could impact your financial life?

Tax Incentives 

There are a handful of previous tax credits that have been expanded upon for homeowners. The new law allows homeowners to claim up to 30% of the costs for eligible home improvements during the year with a limit of $1,200 in credits starting in 2023. The credits are targeted at home improvements that are “energy-efficient” and include upgrades to items like windows, appliances, HVAC units, and solar panels. Tip – You can claim the maximum tax credit in more than one year, so spreading out your improvements over multiple tax years can enhance your tax bottom line each year.

Electric vehicles (EVs) continue to make their way into the mainstream as price tags have decreased and oil prices have generally risen. If you’ve considered purchasing an EV you might be in luck, but you have to be careful. Here’s what I mean: The Inflation Reduction Act maintains a $7,500 credit for the purchase of an EV, but it imposes additional caveats. There are income limitations, caps on the price of the vehicle, and many outright restrictions on which vehicles are eligible. Tip – Do your homework if you’re open-minded about which EV to buy… it could save you $7,500.

Remember, a tax credit is a dollar-for-dollar amount that you can subtract directly from taxes owed. It’s different than a deduction. It’s much more favorable because credits reduce tax owed, not just taxable income.

Corporate Taxes 

As the Inflation Reduction Act has morphed, so have the tax targets. The original version(s) of the bill aimed to focus on the taxation of the wealthy, but this never received bipartisan traction. Eventually the focus turned to corporations.

Going forward, there will be a 15% minimum tax that will apply to corporations with more than $1 billion in annual profits for a three-year period. This is similar to the Alternative Minimum Tax (AMT) that individuals can be subject to. Per estimates from the Joint Committee on Taxation, there are at least 100 companies in the S&P 500 that could fit into this category.

In addition to the minimum tax, there will be a 1% tax on stock buybacks of corporations. A stock buyback is when a public company uses cash to buy shares of its own stock on the open market. A company may do this to return money to shareholders that it doesn’t need to fund operations and other investments. This move by corporations creates value to shareholders and causes the share price of the stock to rise.

There are many ways companies can manage their financial statements. It will be interesting to see how these targeted tax implications change investment and corporate behavior.

Tax Enforcement 

The new bill will increase the IRS budget by $80 billion over the next 10 years. While many in opposition have sounded the alarm that this will lead to auditors targeting the middle class, the IRS claims the funds are for a variety of purposes. The funds will certainly be used to hire additional employees, but they will also be used to upgrade the IRS’ technology in an effort to be more efficient, catch up on a backlog of over 20 million unprocessed tax returns, and increase customer service.

After the upgrades, the remaining funds will be used to strengthen the IRS’ enforcement efforts. Their stated goal is to close the “tax gap”, which is the difference between taxes owed and taxes collected. Treasury Secretary Janet Yellen has said that taxpayers earning less than $400,000 will not see any increase in the rate of audits.

Changes to the law – especially in the areas of tax and estate – can provide planning and strategizing opportunities. Legislation changes and announcements can be confusing and sometimes misleading, which is why it’s important to talk with your financial advisor or tax advisor if you think new legislation may affect your financial life.

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