While not as impactful to personal finances as some other recent bills like the SECURE Act or the CARES Act, the Inflation Reduction Act (IRA) has a few notable components The three major provisions pertain to the cost of prescriptions for people on Medicare, the cost of health insurance for people using the healthcare exchange and incentives for energy-efficient cars and improvements.
Medicare Part D prescription drug coverage was introduced in 2003 and went into effect in 2006. Since then, common complaints from people on Medicare have been that the prices of certain medications are too high and that the out-of-pocket costs for prescriptions are too expensive overall. The high cost of a small number of drugs also makes up a significant portion of the government’s spending on prescription drugs.
To bring prices down, the IRA implemented two primary changes. It authorized the federal health secretary to negotiate the prices of some medications on behalf of Medicare starting in 2025. At that time, 10 drugs will be eligible for price negotiation, with the number increasing to 60 eligible drugs by 2029.
In the meantime, drug companies will have to pay rebates if their drug prices increase faster than inflation, copays for insulin will be capped at $35 per month and many vaccines will become free.
Image credit: Kaiser Family Foundation
ACA Health Insurance Premiums
The American Rescue Plan included an expansion of Affordable Care Act premium tax credits that reduce the cost of health insurance plans purchased through the Healthcare exchange. Set to expire in 2023, the IRA extends these premium subsidies through 2025.
Notable changes that will continue include reducing the cost of health insurance from 4% to 0% for households making 150% of the federal poverty limit and capping the cost of health insurance to 8.5% of income even for individuals who make more than 400% of the federal poverty limit. If you are using a policy on the health care exchange, it is worth examining if you might qualify for lower costs by utilizing these tax credits. You can either reduce the ongoing cost of premiums throughout the year or pay the full cost and receive a tax credit when you file your return.
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Incentives for Energy-Efficiency
There are several climate-focused elements of the IRA including revised electric vehicle credits and credits for making energy-efficient improvements to our homes.
Energy Efficient Home Improvement Credit: Doors, Windows, Insulation, Water Heaters
This replaces an expired credit and in 2023 will equal 30% of the cost of eligible improvements. The law replaces a $500 lifetime cap with a cap of $1,200 per year (though some improvements have individual limits that may be higher or lower than $1,200). It also includes a new $150 per year credit for home energy audits.
Residential Clean Energy Credit: Solar, Wind, Geothermal, Biomass, Fuel Cell Systems
The Residential Clean Energy Credit (also a rebranded version of an old credit that was set to expire) will be available through 2034 and provides a 30% credit for the installation of energy-efficient systems that power or heat our homes.
High-Efficiency Home Rebates: Appliances, Heat & Water Pumps, Insulation, Wiring
For those whose income is between 80% and 150% of the area median income, rebates will be available based on the type of energy-efficient purchase made. The rebate for a stove or dryer is around $840 while a heat pump for heating and cooling qualifies for an $8,000 rebate. Total rebates are capped at $14,000. These will be processed through programs designed by the states.
Electric Vehicle Credit
The new credit for electric vehicles takes effect in 2023 and offers a maximum of $7,500 for new and $4,000 for used EVs. The big change in the IRA is that qualifying cars’ final assembly must be in North America. There are tools to help you determine that using the VIN but for now, the easiest way to know if a car is eligible is to refer to the list of vehicles the IRS has indicated qualify.
For the rest of 2022, the old EV credit is available but some cars like Chevy Bolts and Teslas won’t qualify because they have already sold too many models. That restriction goes away in 2023 but others come into play, such as limiting the credit to filers making less than $150k if single and $300k per year if married as well as limiting the credit to cars that cost less than $55,000 and trucks and SUVs that cost less than $80,000. If you qualify for the credit, it will eventually be provided at the point of sale, rather than waiting to receive it with your tax filing.
The bill also funds a major increase to IRS staff over the next 10 years to audit high-income returns and sets aside money to create a free government system to file tax returns.
While its name doesn’t necessarily align with its provisions, the Inflation Reduction Act does reduce costs for many Americans. It mitigates prescription drug costs for retirees, public health insurance premiums for those across the income spectrum, and the cost of going green over the next decade. As many of these benefits will be tied to household income, the need for careful cash flow and tax planning will be even greater in the years ahead.