Inflation Reduction Act: What you need to know
Advice and Planning offered through Wells Fargo Bank, N.A.
Key takeaways:
- President Biden recently signed into law the Inflation Reduction Act (IRA). The Act includes several tax changes such as tax increases for certain large corporations, incentives to address climate change, clean energy, and provisions to promote health care affordability.
- Consult with your financial advisor and tax advisor to discuss this bill and determine if and when any actions should be taken.
On August 16, President Biden signed into law the Inflation Reduction Act of 2022. The roughly $740 billion tax and spending package includes a new book-minimum tax on certain large corporations, an excise tax on stock buybacks, a significant funding boost for IRS enforcement efforts, a long-term extension of the Superfund excise tax, incentives to address climate change mitigation and clean energy, and provisions to promote health care affordability.
The Inflation Reduction Act did not include many of the items from prior proposals. Substantially all of the individual tax cuts from the 2017 Tax Cuts and Jobs Act remain in place. Marginal tax and capital gains tax rates remain unchanged. There are no changes to the estate and gift tax exclusion amount. Keep in mind that many of the Tax Cuts and Jobs Act provisions are still set to sunset at the end of 2025.
To learn more about what the Inflation Reduction Act means for the U.S. economy and investors, read Wells Fargo Investment Institute’s (WFII) August Policy, Politics & Portfolios report.
| Provision | *Details | Effective date |
|---|---|---|
| Taxes | ||
| IRS Enforcement | $80 billion to the IRS over a 10 year period: The additional enforcement funds will be used to address noncompliance in areas such as large corporate and global high-net-worth taxpayers, pass-through entities, and multinational taxpayers with international tax issues. The IRS is looking to put in place sophisticated, specialized teams that are able to review complex structures and identify areas of noncompliance. Work with your tax advisor when employing aggressive tax strategies. | 8/16/22 |
| Corporate alternative minimum tax | 15% alternative minimum tax on “adjusted financial statement income” (AFSI) for corporations with $1 billion in revenue over a three-year average; a lower $100 million threshold applies for foreign-headquartered groups. | 1/1/2023 |
| Stock buyback excise tax | This measure applies a 1% excise tax on the fair market value of any stock repurchased of a covered corporation (subject to certain exceptions). This does not impact the individual taxpayer, only the corporation participating in stock buybacks. | 1/1/2023 |
| Extension of excess business loss limitation | Excess loss limitation for noncorporate taxpayers is extended for two years; through taxable years beginning before January 1, 2029. | Extended for 2 years |
| Healthcare | ||
| Insulin Price Cap and Medicare enhancements | Insulin price cap for Medicare participants. Enables federal government to negotiate drug prices. Medicare Part D changes to cost sharing and out-of-pocket-costs. Free vaccines. Prescription drug rebates. Affordable Care Act Extension through 2025 | Varies |
| Clean Energy | ||
| Energy Security and Climate Change Investments | Spending and credits intended to: Speed transition from fossil fuels to renewables, nuclear power and other low-carbon emissions. Accelerate renewables equipment reshoring to the U.S. Distribute renewables tax incentives and funding broadly across production, intermediate and final users among households and businesses. | Varies |
*Source: Mindset DC Memo “Detailed Summary of the Inflation Reduction Act of 2022”
What is not included in the Inflation Reduction Act?
We wanted to make mention of items that gained attention in previous versions of this bill (and from the previously known “Build Back Better” bill) that did not pass. These include, but are not limited to, the expansion of Net Investment Income Tax (NIIT) on business income, surcharge on high income earners, increases to the state and local tax deduction (SALT), limitations on ROTH IRA conversions, and modifications on the qualified small business stock exclusion. The proposed change to carried interest was also removed from the final version of the Inflation Reduction Act.
What actions should I consider taking?
For individuals that feel they may be impacted by these changes, consult with your financial advisor and tax advisor to discuss this bill and determine if and when any actions should be taken. Continue to evaluate traditional year-end tax planning strategies that may be appropriate for your situation. Ask your advisor for a copy of the Tax Planning Guide which discusses many of these strategies.
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Wells Fargo & Company and its affiliates do not provide legal or tax advice. In limited circumstances, tax advice may be provided by Wells Fargo Bank N.A. Please consult your legal and/or tax advisors to determine how this information and any planned tax results may apply to your situation at the time your tax return is filed.