16 August 2022
TOPIC: The Inflation Reduction Act
This guide is a little different from most guides. I will break down the new Inflation Reduction Act signed into law earlier this week.
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What Is The Purpose Of The Inflation Reduction Act?
This bill is a modified slim version of the build back better act. The build back better act was rejected last year by senator Joe Manchin.
However, after months of negotiation, Joe Manchin agreed to have the bill passed under a new name inflation reduction act.
Under this bill, the democrats plan to spend $500 billion to help lower inflation, promote clean energy, and have better medical care.
How Will This Bill Lower Inflation?
The big goal of this bill is to decrease inflation. There are three ways they plan on lowering inflation.
Here is a list:
- They plan to decrease the federal deficit
- Improving the manufacturing of renewable energy
- Lower the price of drug prescriptions.
The federal deficit is the difference between how much our government spends and how much it makes.
This new bill already has plans to increase how much revenue comes in from taxes. We will talk more about one of their plans in the next section.
The government also plans to spend $40 billion on green manufacturers to increase renewable energy production.
The democrats hope to have more supply than demand which will, in turn, lower inflation.
Finally, this bill will limit the price of certain prescription drugs.
As a result, Medicare will now be able to negotiate the price of prescription drugs.
The goal of this is to make medication more affordable for Americans. The negotiations will begin in 2026.
Four years from now, Medicare will begin negotiating the price of ten drugs. In 2029 the negotiations will be increased to 20 drugs.
They project that this Drug Pricing Reform will bring in $265 billion.
How Will It Impact My Tax Bill?
This new bill did make some changes to the current tax environment. $80 billion of the $500 billion will be spent on improving the IRS.
The Americans for Tax Reform President discussed the IRS targeting small businesses after securing $80 billion from the bill passing.
The IRS plans to make at least $200 billion thanks to IRS enhancement.
Note: Assuming their profit projection is correct, their net savings from this venture will be $124 billion.
However, 78% to 90% of the $200 billion will be collected from small businesses making less than $200,000 annually.
A study done in 2021 showed that the IRS audits more people of lower income than those of wealth.
More individuals and small businesses will be audited moving forward. This ultimately means you want to be more mindful when filing your taxes.
This bill also plans on taxing all corporations by a minimum of 15%, which they project will bring in $222 billion in revenue.
However, this 15% minimum tax on corporations does have a couple of exceptions to the rule. We will talk more about that later in the blog.
New Tax On Stock Buyback
A stock buyback is when a company buys back its stocks from investors (like you and me) who are invested in the company.
So the company gives us cash, but in exchange, we no longer have stock (or ownership) within the company.
Normally, when companies decide to buy back stock, the investors would only have to pay capital gains tax.
Assuming they had stock for more than one year, they would be paying a much lower tax rate.
This made stock buybacks more favorable than companies paying out dividends to investors.
As dividends would suffer from double taxation, plus investors would be taxed at ordinary income.
For example, corporations pay taxes on their earnings and then pay shareholders dividends from the after-tax earnings.
If the corporation distributes those earnings as a dividend, the income is taxed again at the individual level.
But company buybacks were special as they would only get taxed once. They get taxed at an individual level + a lower tax rate.
However, this all changed with the new tax bill under the Inflation Reduction Act.
This new tax bill adds a 1% tax to company buybacks.
For example, companies like Apple are buying back $90 billion in stocks and will have to pay 1% (900 million) in taxes.
Senator Chuck Schumer says this new tax law is a way for the government to encourage corporations not to do buybacks.
Instead of buying back stocks, they can focus that money on company growth, hiring employees, equipment, etc.
It is also projected to bring in $74 billion in tax revenue.
What Is EV Tax Credit?
When Biden was elected President, he promised to help steer America to a more Green, eco-friendly future.
He also wanted to reward Americans who swapped to clean energy, and he did this by coming up with EV Tax Credits.
It’s a tax credit that rewards people for buying electric vehicles.
If you are in the market to buy an electric vehicle, then this bill is here to make your life a little easier.
The government will give you a $7,500 tax credit on the spot when you buy the car.
In addition, you will receive a $4,000 tax credit if you buy a used EV.
Does This Credit Work For Tesla and GM?
The old version of this bill stated that this EV tax credit only applies to only certain car manufacturers.
To qualify for this credit, you must buy an electric vehicle from a manufacturer that has not sold over 200,000 EVs.
Companies like Tesla and General Motors would not qualify for this tax credit. However, that was the old bill.
This newly updated bill states that you will get this tax credit from anyone who sells EVs.
So, this tax credit will be available to Tesla and GM EVs thanks to new bill modifications.
What Else Is Included In This Bill?
Here is a list that shows everything else this 500 billion dollar bill is trying to accomplish.
Note: All the numerical values below are listed in billions of dollars.
These are all things that will cost the government money to implement.
| Clean Electricity Tax Credits | -$161 |
| Air Pollution, Hazardous Materials, Transportation and Infrastructure | -$40 |
| Individual Clean Energy Incentives | -$37 |
| Clean Manufacturing Tax Credits | -$37 |
| Clean Fuel and Vehicle Tax Credits | -$36 |
| Conservation, Rural Development, Forestry | -$35 |
| Building Efficiency, Electrification, Transmission, Industrial, DOE Grants and Loans | -$27 |
| Other Energy and Climate Spending | -$14 |
| Extension of Expanded ACA Subsidies (three years) | -$64 |
| Part D Re-Design, LIS Subsidies, Vaccine Coverage | -$34 |
| Here is a list of things that will bring in money or save the government money. | |
| Repeal Trump-Era Drug Rebate Rule | $122 |
| Drug Price Inflation Cap | $101 |
| Negotiation of Certain Drug Prices | $99 |
| 15 Percent Corporate Minimum Tax | $313 |
| IRS Tax Enforcement Funding | $124 |
| Closure of Carried Interest Loophole | $13 |
| Methane Fee, Superfund Fee, Other Revenue | $18 |
What Changes Were Made To The Inflation Reduction Act?
After Sens. Joe Manchin approved the new Inflation Reduction Act, there was still one democrat senator they needed for the bill to pass.
Her name was Kyrsten Sinema, and she would approve of this bill if some modifications were made to it.
Kyrsten Sinema said she would not pass the new bill unless they stop trying to close tax loopholes.
Specifically, the tax loophole allows investment managers to avoid paying high taxes.
Note: The top federal tax rate is 37%.
However, thanks to a tax loophole that Kyrsten is protecting, these managers can get away paying 23.8% max.
The 15% minimum tax on corporations will no longer apply to private equity firms.
So thanks to Kyrsten Sinema, private equity firms and investment bankers can still enjoy paying low taxes.
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