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Regulation and Compliance > Legislation

The Inflation Reduction Act’s Impact on Your Client’s Bottom Line

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What You Need to Know

  • The act would extend expanded premium tax credit rules and lock in American Rescue Plan health coverage rates through 2025.
  • An alternative minimum tax would ensure that corporations with at least $1B in profits would be subject to a minimum 15% income tax rate.
  • The act also proposes a 10-year extension of incentives for clean energy home projects and purchasing electric vehicles.

On Aug. 7, the Senate approved the Inflation Reduction Act via the budget reconciliation process. The act is geared toward tackling climate change, making prescription drugs more affordable and taking steps toward raising taxes on some of the largest and most profitable corporations.

Most of the sweeping and significant tax increases on individuals and small businesses were not included in the latest piece of legislation to be considered in Congress.

But the law as written does contain provisions that could significantly affect both individual taxpayers and corporations.

While it remains unclear whether the act will pass in the Senate in its current form, it does appear likely that some version of the law will pass — meaning that advisors should start to familiarize themselves with the provisions to add value for clients going forward.

Health-Related Provisions for Individual Taxpayers

The American Rescue Plan, or ARP, expanded the premium tax credit rules to provide a more generous Affordable Care Act benefit for 2021 and 2022. Under the normal rules, the premium tax credit is available to taxpayers with household income between 100% and 400% of the federal poverty level. 

The ARP essentially eliminated the upper income limit and increased the amount of the premium tax credit by decreasing the percentage of household income that individuals are required to contribute to their health insurance coverage.

Under the ARP, the percentage rates ranged from zero to 8.5% of household income (down from between 2.07% and 9.83% in 2021 under prior law) regardless of how much a family earns. 

In other words, even taxpayers with household income that exceeds 400% of the federal poverty line could be eligible for a credit if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income.

The Inflation Reduction Act would extend these rules and lock in the ARP’s rates through 2025. The provision is designed to prevent millions of Americans from losing health coverage under the expanded ARP rules.

Proposed Corporate Tax Hikes

The act contains a provision that would add a new 15% corporate alternative minimum tax to ensure that corporations with at least $1 billion in profits would be subject to a minimum 15% income tax rate (remember that the traditional corporate alternative minimum tax was eliminated in the 2017 tax reform package). 

The 15% rate would be applied to the company’s “book income” rather than adjusted gross income as reported to the IRS, in an effort to prevent corporations from using loopholes to escape taxation.

If enacted in its current form, the new law would require corporations to determine their tax liability in two ways. First, the corporation would calculate taxes using the existing 21% rate structure, using currently available deductions and credits.

Second, they would calculate tax liability by applying the 15% rate to their book income as reported to shareholders and investors on financial statements. The corporation would then owe whichever rate is higher.

In the end, the new system would mean that many corporations wouldn’t be able to take advantage of existing tax deductions and credits.

Energy-Related Tax Credits

The act also proposes significant changes that could affect clients’ financial decisions surrounding adopting cleaner energy initiatives. For example, the act would provide a 10-year extension of current tax credits for individual homeowners for clean energy home projects, such as rooftop solar panels and energy-efficient HVAC systems.

The law would also extend the existing electric vehicle tax credits for 10 years. The law would also, however, contain limits on the vehicle’s manufacturer’s retail sales price and income restrictions. That means that some of the wealthiest taxpayers would be unable to take advantage of electric vehicle tax credits, and luxury vehicles would not qualify.

The law also proposes to allow taxpayers to claim the electric vehicle tax credit at the time the vehicle is purchased, so that average Americans would not have to wait until they file their taxes to take advantage of the credit.

Conclusion

It now seems highly likely that the Inflation Reduction Act will be signed into law this month. Taxpayers should pay close attention to the details going forward, as some of the green energy initiatives could create tax savings going forward.


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