President Joe Biden signed the Inflation Reduction Act in Aug. 2022. While the law’s name alludes to the Biden administration’s desire to bring down historically high price growth, analysts say its impact will be felt in domestic energy production, climate investments, and drug price reform. And the measures laid out in the law could save consumers thousands of dollars a year.
Because the new law could lower energy bills and provide tax and other incentives for consumers, it’s important to know what’s in the new law so you can take advantage of potential savings. Here is a rundown of the Inflation Reduction Act and how it could save you money.
What Is the Inflation Reduction Act?
The Inflation Reduction Act of 2022, or the IRA for short, is a law intended to curb inflation by reducing the deficit, promoting domestic energy production, and lowering healthcare costs. President Joe Biden signed the IRA on Aug. 16, 2022.
The Biden administration and Congressional Democrats pushed to pass this legislation to tackle the highest levels of inflation the United States has experienced in more than 40 years. Additionally, the lawmakers wrote the law intending to combat climate change by investing in domestic energy production and carbon-reducing and green technologies.
Analysts estimate that the IRA will raise more than $700 billion in savings and revenue over 10 years through new taxes and tax and prescription drug pricing reform. This revenue will be raised, in part, through a 15% corporate minimum tax, a 1% stock buyback fee, and enhanced Internal Revenue Service (IRS) tax enforcement.
In contrast, the law will lead to more than $400 billion in new spending and tax cuts related to climate, energy, and healthcare initiatives. In all, the new law may reduce the federal budget deficit by about $300 billion over the next ten years.
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Will the Inflation Reduction Act Reduce Inflation?
Experts believe the Inflation Reduction Act will have a negligible effect on bringing down inflation in the short term.
Inflation, which rose 8.5% annually in July 2022, is near the highest it has been since the early 1980s. The Federal Reserve started to raise interest rates in early 2022 to bring down prices, but it remains to be seen if the monetary policy moves will effectively curb inflation. Nonetheless, economists believe that short-term inflation reduction is the job of the Federal Reserve.
However, over the medium- to long-term, fiscal policy, like the Inflation Reduction Act, could reduce consumer costs. Specifically, analysts have said that the law’s measures to increase oil, gas, and clean energy production and lower prescription drug prices may bring down inflation over the next ten years.
How the Inflation Reduction Act May Save You Money
Proponents of the Inflation Reduction Act say that the law will cut consumers’ energy bills by $500 to $1,000 per year due to lower fuel prices, electricity rates, and more efficient energy consumption.
The law may also make it more affordable for consumers to purchase electric vehicles and deliver a range of tax incentives and rebates that provide direct, material benefits to consumers.
Because many of the Inflation Reduction Act’s consumer benefits come from rebates and tax credits, it’s best to talk with a financial and tax expert to understand how you may benefit from the law.
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Home Energy
The law extends a tax credit through 2032 for households and consumers who make energy-efficient home upgrades. Households can get up to $1,200, or 30% of the total cost, in tax credits for energy efficiency improvements like new doors, windows, or insulation. Additionally, households can get up to $2,000 in tax credits for installing efficient heating, cooling, and water heating equipment, such as a heat pump.
These credits take effect immediately; households can claim the credit for new purchases. Households can also claim these credits multiple times in subsequent years. For example, a household can claim the tax credit in both 2022 and 2023 if they buy and install new windows for a bedroom this year and new windows for a kitchen next year.
The Inflation Reduction Act also provides a 30% annual tax credit through 2032 — and phases down after 2032 — for households that install clean energy systems like solar energy, wind, geothermal heat pumps, fuel cells, and battery storage.
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The law also sets aside $8 billion for a state-run program for low- and middle-income households that provide rebates for new, energy-efficient upgrades. These rebates are:
• Up to $1,750 for a heat pump water heater
• Up to $8,000 for a heat pump for heating or air conditioning
• Up to $840 for an electric stove, cooktop, range, or oven; or an electric heat pump clothes dryer
• Up to $4,000 for an electric breaker box upgrade
• Up to $1,600 for insulation, air sealing, and ventilation
• Up to $2,500 for electric writing
These rebates may be available to buyers who make 80% or less than the area median income (AMI), while buyers who make up to 150% of the AMI may see a smaller benefit. Eligible households or individuals may not receive more than $14,000 in rebates.
Recommended: Strategies to Lower Your Energy Bill When Working From Home
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Electric Vehicles
The Inflation Reduction Act provides a tax incentive for purchasing new and pre-owned clean vehicles, like electric vehicles (EVs) or hydrogen fuel cell cars, and for supporting equipment. The tax credits for clean vehicles are:
• Up to $7,500 for a new clean vehicle
• Up to $4,000 for a pre-owned vehicle
However, restrictions on what kinds of clean vehicles are eligible for the tax credit may limit how the incentive benefits consumers. The vehicles must meet specific criteria to qualify for the tax credit, such as:
• Vehicles must be assembled in North America
• A certain percentage of a battery’s components must be mined or produced in the United States or a country with a free trade deal with the U.S.
• The MSRP of a pickup or SUV must not be over $80,000; other personal vehicles must not exceed $55,000
Additionally, to qualify for the tax credit, the income of the buyer of a clean vehicle must not exceed $150,000 if single, $225,000 if the head of a household, or $300,000 if married.
Healthcare
The Inflation Reduction Act is expected to provide benefits to individuals with health insurance coverage under Medicare.
The law enacts prescription drug pricing reform, allowing Medicare to negotiate prices for some drugs starting in 2026. This new measure may impact consumers who are prescribed one of the drugs with negotiated prices, resulting in lowered healthcare costs. Previously, Medicare was not allowed to negotiate drug prices.
Furthermore, the law caps insulin costs for people on Medicare at $35 per month starting in 2023. In 2025, out-of-pocket drug costs for Medicare beneficiaries will be capped at $2,000 per year.
Recommended: Beginner’s Guide to Health Insurance
The Takeaway
Since the Inflation Reduction Act is so new, the overall effects of the law are still unclear. But for now, consumers should be aware of the potential impacts of the law on their wallets. This is especially the case for individuals interested in making energy-efficient upgrades to their homes; the new law provides incentives that could lead to thousands of dollars in savings per year.
Looking for more ways to boost your savings? Consider opening an online bank account with SoFi. When you open our Checking and Savings with direct deposit, you can earn a competitive APY — and not worry about fees or overdraft charges. Plus, eligible account holders have access to their paycheck up to two days early.
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