The Inflation Reduction Act, a version of last year’s Build Back Better, passed in mid-August 2022 and is meant to help bring inflation back down to normal levels and combat climate change. With so much buzz in the media regarding the Inflation Reduction Act we decided to condense the (roughly) 700-page document into one easy to digest blog to help you understand how this will help inflation, what it means for you and what is missing from the bill. One thing to keep in mind is that this act is not expected to immediately lower inflation. The economy may start to experience the benefits of this act in 2023 or beyond.
How will this help inflation?
- By reducing the Federal deficit, there will be less money in the economy. This should lessen demand and in turn, lead to fewer price hikes.
- The bill offers incentives (tax credits) to people moving towards more sustainable energy (electric vehicles, solar panels, etc.). This will encourage more production, driving up supply, and hopefully lowering costs over time.
- This bill will limit the price growth on certain prescription drugs. Medicare would be allowed to negotiate their cost with the pharmaceutical companies.
What does this mean for me?
- If you were wanting to make the switch to more sustainable energy now may be the time. These incentives do not take effect until 2023, but the subsidies cover several improvements including efficient heat pumps, electric water heaters, electric cooktops, and a credit for installing solar panels. These changes can help the environment and your wallet over time. Rewiring America estimates that making these changes could save families and average of $1,840 per year on energy costs.
- There will also be incentives for people looking to purchase electric vehicles both new and used. Starting in 2023 you can receive $7,500 for new and a $4,000 credit for used. There are restrictions on where the cars/batteries and components must be sourced from, which could limit the effectiveness of these incentives.
- An immediate (and exciting) benefit is faster tax refunds and quicker responses from IRS agents. $80 billion in funding has been allocated to the Internal Revenue Service over the next 10 years. This could mean an additional 80,000 IRS personnel hired. There is also framework for a program that would allow Americans to file their taxes directly with the IRS free of charge.
What’s missing?
The Inflation Reduction Act is missing several initiatives from Build Back Better. Unfortunately, many of these would have directly benefited parents and families including federal paid family and medical leave, subsidized childcare, and the expansion of the child tax credit for another year and funding for universal pre-K. It was once expected that this bill would include state and local (SALT) tax breaks on your federal tax return. These were capped with previous tax legislation. The bill did not include SALT caps increases.
We will have to wait and see what the impact will be on inflation and climate change. If you’re skeptical about the immediate inflation reduction of a bill that includes new spending, you’re not along. If you are looking for practical, immediate ways to combat inflation, check out Hannah Near’s blog from earlier this month.
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Alexa Kane, CFP®, CDFA® is a financial advisor at Pearl Planning. Reach out for a call today at 734.274.6744.
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