On August 16, 2022, President Biden signed the Inflation Reduction Act into law. This landmark legislation not only addresses recent inflation-related cost increases, but also takes action on climate change, lowers health care costs, and raises corporate taxes. Additionally, the provisions of the Inflation Reduction Act are expected to help reduce the national deficit and put us on the path to a clean energy future.
But what does the Inflation Reduction Act mean to you? If you’ve been paying attention at the supermarket, for example, you may have noticed that food prices have risen by 12.2% over the past twelve months, as part of an overall wave of rising prices. How long can it take for prices to drop?
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 may affect your everyday 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 toward clean energy.
The Inflation Reduction Act also contains two important provisions related to health care — first, by allowing Medicare to begin negotiating prescription drug costs; second, by extending current Affordable Care Act premium subsidies through 2025.
“Over the next decade, the Inflation Reduction Act is expected to reduce the deficit by $300 billion,”; Washington explains. “The bill calls for affordable health care premiums purchased through the Marketplace. Additionally, it is expected to lower the prices of certain prescriptions for Medicare beneficiaries.”
If you’re interested in learning more about the Inflation Reduction Act, the White House has issued a 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 drop, you may have to wait a little longer. The Inflation Reduction Act is designed to reduce price increases caused by inflation and increase the purchasing power of the average American. But it may take some time before you notice a difference in food costs and other daily expenses.
“With the implementation of the Inflation Reduction Act, taxpayers will not immediately see an impact on inflation, but they may later,” said 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 in the long run. If you can end the month with extra cash, consider putting it toward an emergency fund or other savings goals—and save the money until prices start to come down again.
How will the Inflation Reduction Act affect your tax refund?
“American households can benefit from tax relief provided by the Inflation Reduction Act,” Washington said. She suggests setting aside time to meet with a tax specialist before the end of the year, especially if you plan to buy a clean energy vehicle or make energy efficient home improvements.
“There are tax credits for the purchase of new and used clean energy vehicles,” says Washington. “Taxpayers can 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 may 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, stove and other appliances,” says Washington.
Part 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 buying a new electric car, for example, was already part of current tax law; The Inflation Reduction Act simply extends the credit to 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.
That’s 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 it would have been good advice even before the Inflation Reduction Act became law.