What the Inflation Reduction Act Means for You

On Aug. 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. This bill brings massive changes likely to impact millions of Americans over the next several years. A sprawling piece of legislation, it will affect Medicare, the Internal Revenue Service, the national energy system and more.

When it comes to your wallet, the IRA has the potential to cut costs at the pharmacy, make it easier to file your taxes and subsidize the cost of making sustainable energy switches that could save you money in the long run. But maybe you’re one of the 59% of Americans that say they’re totally unfamiliar with the bill and its promises.[1] Here are the biggest changes that could impact you.

Medicare patients are big winners under the IRA. The bill allows the government to negotiate prescription drug costs with pharmaceutical companies, a move that’s expected to lower drug costs and reduce government spending.[2] The IRA also caps out-of-pocket drug costs at $2,000 a year as well as the cost of insulin at $35 for Medicare patients.[2]

The bill will also positively impact Americans who use the Affordable Care Act (ACA) marketplace for insurance. The IRA will extend the premium subsidies for three more years, a move the White House estimates will save 13 million Americans $800 a year and allow 3 million more Americans to have health insurance that otherwise wouldn’t.[3]

“The bill also lowered the requirements for eligibility to receive financial assistance with the objective of expanding the number of middle class ACA participants receiving financial benefits,” says John Behringer, a Certified Public Accountant (CPA) and partner with RSM US LLP, a national audit, tax and consulting firm.

With $80 billion in additional funding for the IRS, the IRA seeks to make the tax filing process more pain-free.[4] If you have been unable to reach anyone at the IRS with important questions around tax time—or you waited longer than usual for your refund—you can hope next tax season will be different.

Meet the Expert

John Behringer, CPA, is a risk consulting partner and the national leader of the financial institutions sector at RSM US LLP.

“Taxpayers will hopefully see improved service from the IRS as…[t]hese funds allow for greater staffing,” says Behringer. “Taxpayers who hold digital assets including digital currency may begin to see more correspondence from the IRS as it focuses on digital asset monitoring and compliance.”

The additional funding should also allow the IRA to crack down on corporate and high-income tax evaders, a move that the White House estimates will generate $124 billion in savings over the next decade.[3] At the same time, the White House promises that no household making under $400,000 a year will see a tax hike because of this bill.[3]

The IRA will also incentivize a broader move to sustainable energy nationally.

“Several of the climate initiatives are intended to accelerate the transition to cleaner and renewable energy sources,” says Behringer. “The primary impact to consumers economically comes in the form of various tax credits.”

Here are some new tax credits you might benefit from:

• Electric vehicle tax credits: If you buy a U.S.-made electric vehicle, you can receive a tax credit of up to $7,500 for a new car and $4,000 for a used one.[3] With new electric cars costing $10,000 more than average used electric/gas cars, these credits could make up most of the difference.[7] However, Behringer notes that there are other eligibility criteria to qualify for these credits: “It’s not as easy as simply buying an electric vehicle. Rather, there are a host of eligibility requirements that include sourcing of the materials used to build the battery along with vehicle cost limits and income qualifications.”

• Consumer rebates for energy efficient home systems: The bill offers up to $14,000 in rebates for Americans who install energy-efficient home appliances, such as heat pumps.[3]

• Tax credits for installing solar: Households that install solar panels on their roofs will receive a 30% tax credit.[3]

These measures are intended to not just fight climate change and increase energy efficiency, but to lower overall energy costs for Americans. The White House estimates that these incentives will save each household $500 annually.[3]

While this might not directly impact your bank account, the environmental initiatives in the IRA are considered historic and proponents hope they will make a lasting impact. The IRA contains multiple measures to fight climate change, reduce pollution and invest in clean energy on a large scale. These measures include funding for wind turbines, solar panels, batteries and other clean energy sources.[4]

The bill also contains tax credits for carbon emission reduction and incentives to reduce agriculture’s environmental impact.[4] The goal of all this is to reduce carbon emissions by 40% by 2030 and drive an overall pivot to sustainable energy practices—a legislative impact that climate change experts hail as a landmark.[6]

Critics note that, despite its name, the Inflation Reduction Act is unlikely to tamp down inflation, with analysis from the University of Pennsylvania estimating that the bill’s impact on inflation will be nil.[4] On the other hand, research from Moody’s Analytics states that the overall impact will nudge inflation and the overall economy in the right direction.[8]

Moody’s notes another positive effect of the bill: reducing the government’s budget deficit. The Congressional Budget Office, a nonpartisan research group, estimates that the IRA will decrease the national deficit by $102 billion by 2031.[5]

Another factor to consider is the consequences of the 15% minimum corporate tax and the 1% excise tax on stock buybacks enacted by the new law. While it’s likely to reduce the federal deficit, there could be other inflation-like economic consequences.

“The long-term impact of [the corporate minimum tax] will be worth watching as it may reduce the incentive for some companies and industries to make capital investments,” says Behringer. “This would have an indirect impact on consumers both in terms of potentially slower GDP growth that reduces wage growth, among other things, while increasing costs to purchase goods as companies pass along the cost of the tax to consumers in the form of higher prices.”

A similar negative impact could follow the excise tax, he notes. A reduced level of stock buybacks could negatively impact stock valuations—driving down the stock market overall and hitting you in your stock portfolio or 401(k) plan.

Republican leaders in Congress broadly disapproved of the bill, denouncing it as government overreach and irresponsible spending. Sen. Lindsay Graham (R-SC) took to Twitter to call it a “tax-and-spend bill at a time when we can least afford it.”[9]

That said, according to a Reuters/Ipsos poll, a majority of Americans support measures contained within the bill, including allowing drug price negotiations with pharmaceutical companies, lowering the cost of renewable energy, extending health care subsidies and closing capital gains loopholes in the tax code.[1]

If the IRA accomplishes what its writers intend, it will save millions of Americans thousands of dollars on energy, health care and taxes. It will also push a greater tax burden on corporations—a move that may decrease the deficit but may also impact economic growth going forward. Like all monumental pieces of legislation, we’ll have to wait and see the immediate and ultimate impacts on our lives as it becomes reality.