Good to Know
Laws enacted by those ladies and gentlemen we send to Congress are seldom a panacea for all. The 2022 Inflation Reduction Act certainly fits that mold, as will be evident as we summarize the winners and losers under the Act. But first, here’s a quick editorial note—as with all of our articles, the author strives for political agnosticism with no ideological bias. Hence, our focus is on the facts, not the headline-grabbing hyperbole by political commentators on either side of the aisle. For example, you will find a reference in this article to the Congressional Budget Office—widely considered a nonpartisan agency—but not to political pundits.
Now, we’ll point out some of the winners and losers, beginning with the winners.
- Medicare is now authorized to negotiate the price for certain prescription drugs. The list of drugs that may be price-negotiated is limited initially but is scheduled to expand significantly over time.
- Retirees and others receiving Medicare prescription drug coverage will pay no more than $2,000 annually beginning after 2025. Although some of the exact details are not yet clear, it appears that future drug price increases will be limited to the rate of inflation.
Individual Income Taxpayers
- Affordable Care Act insureds will continue to receive premium subsidies through 2025. Before the Act, these subsidies were scheduled to expire at the end of 2022.
- New tax credits will be available for households to offset energy costs.
- The drug-price negotiations under the Act may put downward pressure on profits.
- A 15% minimum income tax will be levied against corporations with $1 billion or more in annual income. Apparently, the minimum tax will be assessed on income as reported for financial purposes (i.e., to the SEC and investors) rather than “taxable income” after deductions such as accelerated depreciation. Since the goal of financial reporting is generally to maximize earnings per share through all legitimate means, this change alone is expected to generate billions more for the U.S. Treasury.
- Stock buybacks will incur an excise tax of 1%. For reference, a stock buyback is a corporate strategy to increase earnings per share. Here’s how it works—a corporation buys back its stock to reduce the number of outstanding shares. Even if profits remain the same, fewer shares outstanding shares mean higher earnings per share.
The long-term impact of legislation generally cannot be accurately predicted when the law is passed. This Act is no different. For example, the degree to which the federal deficit is reduced can only be forecast, not guaranteed. Consensus analysis indicates at least some measure of deficit reduction will occur over the next ten years. The non-partisan Congressional Budget Office estimates a deficit reduction of over $300 billion over the next ten years, primarily funded by corporate tax increases.
Financial advisors and planners have much to monitor as the impact of the Act reverberates through the economy.
- Retirement plans may need a review to consider the $2,000 annual cap on Medicare drug costs and, although unrelated to the Act, the dramatic increases to Social Security benefits driven by nearly unprecedented inflation levels.
- Tax plans should incorporate potential new individual tax credits, such as the energy offset credit.
- Investment plans may need to be assessed to determine how allocations should change, if at all, as a result of the new corporate minimum tax and buy-back excise tax. For example, planners and advisors should be alert for strategic changes such as fewer stock buybacks and increased dividend payouts.
- Corporate executives’ nonqualified deferred compensation strategies should be evaluated, especially those working in corporations subject to earnings pressure under the Act.
The Act presents clear opportunities to proactively serve clients; clued-in advisors and planners need competence across the financial spectrum, in this case, the potential retirement, tax, investing, and corporate executive implications of the Act. Click our CFP® Curriculum to dig deeper into the resources provided to recognize and respond appropriately to these kinds of opportunities and more.