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6 IRS Changes Coming in the Next 5 Years That Could Impact Your Finances

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On Aug. 16, President Joe Biden signed the Inflation Reduction Act into law. At $750 billion, it is one of the largest spending packages in American history. Much of the funds will be used to combat climate change, reduce prescription and healthcare costs, and enact tax reform. But when? And how does any of this affect taxpayers

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Here’s a look at some of the key changes of the Inflation Reduction Act that are being implemented over the next five years — and what they may mean for your wallet — as broken down by CPAs and other finance experts.  

Health Insurance Costs 

“Of interest to people who buy their health insurance on an exchange under the Affordable Care Act is that the Inflation Reduction Act increased the premium tax credit available to people enrolled in a qualified health plan,” said Bruce A. Tannahill, director of estate and business planning with MassMutual.

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This change takes effect in 2023. 

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Prescription Drug Costs 

“With the recent rise in inflation, retirees are confronted with balancing rising costs while living on fixed income,” said Brian Mawhinney, CFP, head of financial planning with MassMutual. “To help prevent seniors from forgoing essential services like healthcare, the Inflation Reduction Act attempts to address increasing healthcare costs through tackling rising prescription drug expenses.

“The act allows Medicare to negotiate directly with pharmaceutical companies. For example, about one-quarter of Medicare recipients are dependent on life-saving insulin. As a result of the IRA, these costs will now be capped at $35 per month. Medicare beneficiaries also will receive greater financial protection with a $2,000 cap on annual out-of-pocket expenses for prescription drugs, saving many seniors up to $1,000 annually.”

This first part of this change — the negotiations on the insulin cap — takes effect in 2023. The Medicare cap of $2,000 for prescriptions occurs in 2025.

Credit for Energy-Efficient Home Improvement

“The Nonbusiness Energy Property Credit was renamed the Energy-Efficient Home Improvement Credit and extended through 2032,” said Levon L. Galstyan, CPA at Oak View Law Group. “The credit will equal 30% of the expenses of all permissible home improvements performed during the year, beginning in 2023.”

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Also:

Credit for Clean Residential Energy

“The Residential Clean Energy Credit … was set to end at the end of 2023 but has now been extended to 2034,” Galstyan said. “The Inflation Reduction Act also raised the credit amount, with the corresponding percentage phased out.”

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The credit is 30% for 2023-2032, 26% for 2033 and 22% for 2034, Galstyan said.

“Biomass furnaces and water heaters are no longer eligible for credit,” he said. “They are now covered under the Energy Efficient Home Improvement Credit. But starting in 2023, the new credit will be available for battery storage systems with a minimum 3-kilowatt-hour capacity.”

Credits for Clean Vehicles

“The Inflation Reduction Act adds new credits for qualifying clean commercial and previously owned clean vehicles, extending the Clean Vehicle Credit through the end of 2032,” Galstyan said.

Tax credits consist of the following:

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The IRS and Taxes

The Inflation Reduction Act contains a 1% excise tax on corporate share buybacks, a 15% minimum tax on businesses with annual incomes of $1 billion or more, and an extra $79 billion over 10 years for the IRS, Galstyan said.

“The IRS is putting together a strategy outlining how it intends to use the extra money,” he said. “These resources are not about boosting audit scrutiny on small businesses or middle-income Americans. To better serve all taxpayers, especially small enterprises and middle-class taxpayers, additional resources will be allocated to hiring personnel and developing IT systems.”

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