The Inflation Reduction Act of 2022 passed both chambers of Congress in August and has been signed into law by President Biden. Following nearly a year of debate and doubt over whether the bill would die in a divided Senate, it narrowly passed on a party-line vote. The Democrat-controlled House followed suit, paving the way for the $750 billion health care, tax, and climate package.
The spending package covers a lot of ground, focusing heavily on energy security and climate change. It also makes significant changes to health care costs by allowing Medicare to negotiate prescription drug prices and extending health care subsidies for three years. The Act also includes a few tax provisions that have caught the attention of many and sparked debates on how the law will impact taxpayers.
Tax Impacts of the Inflation Reduction Act
So how will the Act affect taxpayers? While funding for the legislation will not come from direct tax increases on small businesses or families earning less than $400,000 per year. The concern of many industry experts is that this act is a continuation of recent legislative activity that seeks to increase tax revenues through both tax bracket increases as well through modifications to current savings vehicles. A recent example is the elimination of the Stretch IRA. With the sunsetting of the TCJA on the horizon, congress is primed to pass additional tax modifications over the next few years.
So where does the money come from?
There is no explicit language in the bill that calls for individual income tax increases, meaning most of the tax burden will fall on the shoulders of large corporations. The law enacts a 15% minimum tax on corporate book income for corporations with an average annual adjusted financial statement income that exceeds $1 billion. That said, the law gives the IRS budget an $80 billion boost over the next 10 years, which is expected to lead to more audits, especially on those earning more than $400,000.
Additional funding will come from the new 1% stock buyback excise tax. This tax will be calculated on the net amount of total buybacks minus shares issued during the year. It will not apply to stock contributed to retirement accounts, pensions, and employee stock-ownership plans.
How Will the Law Affect Life and Annuity Sales?
Before the law, publicly traded life insurers, which issue annuities and cash-value life insurance policies, would often use stock buybacks to pay shareholders. The new 1% excise tax could lead to a decrease in stock buybacks. That partnered with the 15% minimum corporate tax bracket could see carriers looking for new ways to grow revenue and satisfy shareholders, including increased compensation and more attractive features for insurance and annuity products.
The clean energy tax incentives included in the Inflation Reduction Act could also have a direct impact on retirement plans and savings vehicles. Several provisions of the bill offer tax credits for consumers who purchase electric vehicles and invest in clean energy systems for their homes. A report from Think Advisor suggests there could be a potential impact on these investments as they connect to certain retirement plans.
Where Do You Come In?
So, what is the producer’s role in this scenario? Retirees and near-retirees often face a higher tax burden than necessary due to a complicated system and little-known snags that can cause big losses. With changes due to increasing interest rates, market volatility, and the Inflation Reduction Act becoming law, proactive tax planning with your clients is more important than ever.
To help, IAMS is offering our newly updated 2022 Macro Tax Planning Kit. This complimentary package has the resources you need to start a critical conversation that could help your clients preserve more of their hard-earned wealth over time.
Your kit includes:
- Factfinders, presentations, questionnaires, and checklists
- An Inflation Reduction Act guide
- A consumer-facing Smart Wealth Accumulation (IUL) guide
- Updated tax tables
- Turnkey prospecting letters and social media posts
- A 1040 Guide
- And much more!
