The Build Back Better Act that was so widely discussed at the beginning of the year has come to fruition in the form of the Inflation Reduction Act of 2022, which President Biden signed into law Tuesday. Its objective is to reduce inflation and the deficit, lower drug costs and increase investment in domestic energy production. The outcome of the Inflation Reduction Act will not be known for years to come, of course, but we want to discuss how some important parts of it may affect you.
What’s in the Inflation Reduction Act?
1. The bill introduces a 15% minimum corporate tax that applies to companies generating more than $1 billion in annual profit (based on a three-year average). Congress’ Joint Committee on Taxation estimates that fewer than 150 companies will be subject to the new rate. At the same time, there is a new 1% tax on stock buybacks. A stock buyback, or share repurchase, occurs when a company buys outstanding shares of its own stock to reduce the number of shares available on the open market. One reason companies may do this is to increase the value of the remaining shares available. It is an investment a company makes in itself when it believes its shares are trading too cheaply in the open market. The new 1% tax goes into effect in 2023, which could cause some companies to speed up buying shares this year and “tilt future capital deployment toward dividends,” Wells Fargo says.
2. The act has the potential to save retirees a significant sum of money on healthcare costs. It allows Medicare to negotiate prices for certain drugs for the first time in 2026 — starting with 10 drugs, then expanding the list to 15 drugs in 2027 and 20 in 2029. The act caps out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries, starting in 2025. Today, there is no cap on what people may spend. The act also caps insulin costs at $35 per month for those on Medicare. Additionally, all vaccines will be covered under Medicare part D. According to a recent study by the Center for Retirement Research, retirees spend about 25% of their Social Security on medical expenses, including Medicare premiums and out-of-pocket costs for prescription drugs.
3. The Inflation Reduction Act allocates $80 billion over 10 years to increase IRS enforcement on taxpayers with more than $400,000 in income, with the goal to catch more tax cheaters. It is widely believed that this will dramatically increase the need for labor in our country, but with the unemployment rate at 3.5%, the question is: Where will the IRS find the new auditors needed?
Expected Results from the Inflation Reduction Act
15% corporate minimum tax: $313 billion*
Prescription drug pricing reform: $288 billion**
Enhanced IRS tax enforcement: $124 billion**
Total revenue raised: $725 billion
Energy security & climate change investment: $369 billion***
Affordable Care Act extension: $64 billion**
Total investments: $433 billion
TOTAL DEFICIT REDUCTION: $292+ billion
* Joint Committee on Taxation, ** Congressional Budget Office, *** Both
4. The largest investment made by the Act relates to energy security and climate change, with billions of dollars going to expand wind and solar power production. Additional subsidies will be available for purchases of electric vehicles as well as funding for people to install energy-efficient heating and cooling systems in their homes. However, new rules make the EV tax credit harder to get, as there are limits as to the percentage of production that must occur in North America for the cars as well as for batteries. The credit is unavailable if the taxpayer’s adjusted gross income exceeds a threshold amount ($300,000 for taxpayers filing a joint return, $150,000 for single filers). There also is money available to oil companies to reduce greenhouse gas emissions and penalties for those that fail to do so.
No one can predict the long-term results of the Inflation Reduction Act of 2022. The good news is that inflation appears to be easing on its own as global supply chain disruptions ease and the Federal Reserve’s tightening of money supply is working. There is little debate, though, that this bill will help reduce the deficit. Retirees stand to benefit heavily from the future reduction in drug costs. The legislation stands to create the single largest investment in climate and energy in the U.S. to date: roughly $369 billion, with estimates of cutting emissions by as much as 40% by 2030. At the end of the day, though, we won’t know for many years how the Inflation Reduction Act affects inflation or corporate profitability.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: CNBC, Investopedia, Financial Planning Magazine, Kestra Investment Management
This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
Past performance is not a guarantee of future results.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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