What's in the Inflation Reduction Act?

Last August, President Biden signed into law the Inflation Reduction Act, a sweeping $750 billion effort to address inflation by reducing health care costs; to bring down the federal deficit by bolstering tax collections; and to combat climate change by encouraging domestic clean-energy production. 

While the new Republican majority in the House of Representatives may try to revise or even repeal aspects of this plan, a Democratic-controlled Senate and White House likely would prevent any changes in the near term. Here are four of the biggest takeaways.

Two provisions aim to make health care more affordable:

The legislation establishes caps on certain drug prices for Medicare participants, to be phased in over time, including insulin—which will be capped at $35 per month beginning in 2023—and annual out-of-pocket costs for prescription drugs, which will be capped at $2,000 beginning in 2025. 

What's more, 10 drugs will see negotiated pricing beginning in 2026, 15 in 2027 and 2028, and 20 in 2029. The list of the first 10 drugs is expected in September.

The law extends subsidies for people who buy health insurance through the ACA marketplace from the end of 2022 to the end of 2025.

The new law includes two key tax credits in 2023 to help encourage taxpayers' adoption of clean-energy alternatives:

Homeowners who install eligible appliances, heat pumps, solar panels, and windows can claim a credit for up to 30% of those costs, up to an annual limit of $1,200.

Taxpayers who purchase new EVs are eligible for a credit of up to $7,500—provided the buyer's adjusted gross income is $150,000 or less ($300,000 or less for married couples filing jointly); the cost is less than $55,000 for a sedan or $80,000 for an SUV/truck/van; and the EV's final assembly took place in North America. 

If all conditions are met, the size of the credit will depend on what percentage of the battery's critical minerals were sourced from the U.S. or a country with a free-trade agreement with the U.S. and what percentage of the battery's components were manufactured in North America. Although a large number of EVs are already manufactured in the U.S., most batteries are sourced through China, meaning the number of vehicles eligible for the full credit is currently quite small. 

Buyers can find a list of eligible 2022 and 2023 EV models—as well as a tool to look up an EV's assembly location using its vehicle identification number—by searching for "Electric Vehicles with Final Assembly in North America" on afdc.energy.gov.

Used EVs are eligible for a credit of up to $4,000—provided the buyer's adjusted gross income is $75,000 or less ($150,000 or less for married couples filing jointly); the used EV is at least 2 years old; and the EV was purchased through a licensed dealer for less than $25,000.

The agency will receive roughly $80 billion in funding over the next 10 years to increase personnel, upgrade technology, and beef up its compliance and enforcement capabilities.

The goal is to close the tax gap, which is the difference between the IRS' estimate of the taxes that are owed to the federal government and those that are collected. Additional staffing will also help the IRS clear the backlog of more than 13 million unprocessed tax returns, as well as improve customer service (in 2022, the IRS answered just 18% of calls).

Two new taxes could potentially affect businesses and their investors:

• A 15% corporate minimum tax will apply to companies with an average of more than $1 billion in profits over three years. Roughly one-fifth of the companies in the S&P 500^® Index could face this new tax—including Amazon, Apple, Bank of America, General Motors, Intel, Meta, UPS, and Verizon—which could cut into profits.
• A 1% tax would apply on net buybacks, which are the total number of shares repurchased minus the number of shares issued during the year. (In the first half of 2022, S&P 500 companies repurchased more than half a trillion dollars' worth of shares.) Companies looking to avoid the tax might instead increase their dividend and/or issue a special dividend.