On August 16, 2022, President Biden signed the Inflation Reduction Act into law. This landmark legislation not only addresses the recent cost increases associated with inflation, but also takes action against climate change, lowers healthcare costs and raises corporate taxes. Plus, the provisions in the Inflation Reduction Act are expected to help reduce the national deficit and put us on the path towards a clean energy future.
But what does the Inflation Reduction Act mean for you? If you’ve been paying attention at the supermarket, for example, you might have noticed that grocery prices have gone up by 12.2% in the past twelve months, as part of an overall wave of rising prices. How long could it take before prices go down?
We asked Kemberley Washington, CPA and Tax Reporter at Forbes Advisor, what to expect now that the Inflation Reduction Act has passed — including how the law might affect your day-to-day purchases and what you can do to save money on your 2023 tax return.
What is the Inflation Reduction Act?
The Inflation Reduction Act is designed not only to lower costs associated with inflation, but also to reduce the deficit, reform the tax code and repair the climate by working towards clean energy.
The Inflation Reduction Act also includes two important provisions related to healthcare — first, by allowing Medicare to begin negotiating prescription drug costs; second, by extending current Affordable Care Act premium subsides through 2025.
“Over the next decade, the Inflation Reduction Act is expected to reduce the deficit by 300 billion dollars,” Washington explains. “The bill calls for affordable health care premiums purchased through the Marketplace. Also, it is expected to lower prices for certain prescriptions for Medicare recipients.”
If you’re interested in learning more about the Inflation Reduction Act, the White House has issued a by-the-numbers summary of the new legislation.
How will the Inflation Reduction Act affect your purchasing power?
If you’re waiting for your grocery and utility bills to go down, you may need to wait a little bit longer. The Inflation Reduction Act is designed to reduce price increases caused by inflation and boost the purchasing power of the average American. But it might take some time before you notice a difference in food costs and other day-to-day expenses.
“With the implementation of the Inflation Reduction Act, taxpayers will not immediately see an impact on inflation, but they could later,” says Washington.
In the meantime, continue to practice good financial habits by sticking to a budget, cooking more meals at home and setting financial goals that are likely to benefit you and your family over the long term. If you are able to end the month with extra money, consider putting it into an emergency fund or toward other savings goals — and save your splurges until prices start going down again.
How will the Inflation Reduction Act affect your tax refund?
“American households can benefit from tax breaks provided by the Inflation Reduction Act,” says Washington. She suggests setting aside time to meet with a tax professional before the end of the year, especially if you plan on purchasing a clean energy vehicle or making energy-efficient home improvements.
“There are tax credits available for the purchase of new and used clean energy vehicles,” Washington says. “Taxpayers may qualify for up to $7,500 for new clean energy vehicles and up to $4,000 for used vehicles.”
Likewise, homeowners who make energy-efficient improvements to their homes could be eligible for tax credits worth thousands of dollars. “Among the improvements may be the installation of solar panels and the purchase of appliances, such as an electric stove, cooktop, range, and other appliances,” Washington says.
Some of the tax credits included in the Inflation Reduction Act are extensions of existing tax credits. The ability to qualify for a credit worth up to $7,500 after purchasing a new electric car, for example, was already part of current tax law; the Inflation Reduction Act simply extends the credit until 2032. It’s also worth noting that many of the tax credits come with eligibility caps based on income — and not all clean energy vehicles or energy-efficient home improvements may qualify for the credit.
This is why it’s so important to talk to a CPA or tax professional before making any major home improvements, electric vehicle purchases or financial decisions that could affect your taxes. But that would have been good advice even before the Inflation Reduction Act became law.