What the Inflation Reduction Act means for retirees and your clients

10 ways the Inflation Reduction Act could affect your clients

When the Inflation Reduction Act was signed into law by President Biden on August 16, it marked the arrival of the most sweeping pieces of legislation passed in recent years. The package impacts several key areas — including climate policy, health care, and taxes — and will attempt to reshape large swaths of the U.S. economy.

This law is likely to be felt by much of the population, including your clients. We’ve broken it down into 10 key ways the law could affect your clients and their retirement.

Health care

1. Prescription drug costs. The law will allow the U.S. government to negotiate prices for medications on behalf of Medicare¹ — which could mean some savings on prescription drugs for seniors.
2. Health care savings. Out-of-pocket expenses for Medicare Part D beneficiaries have been capped at $2,000 annually, which may remove a significant concern among many retirement age individuals — rising health care costs.
3. Affordable Care Act expansion. The legislation also extends a pandemic-era broadening of who is eligible for financial help with accessing medical plans available on the Affordable Care Act’s insurance exchanges. The deal would lengthen the time these tax credits are available to through 2025.

Given the focus on Medicare, the law’s health care provisions may be of particular interest to your clients over 65. Talking about these changes should also include discussions about long-term care — something an estimated 70% of your clients over the age of 65 will need.²

Climate change

4. Electric vehicles. The law includes rebates for consumers to purchase electric vehicles. Specifically, it calls for a $7,500 federal tax credit applied when consumers purchase a brand-new electric vehicle. A $4,000 federal tax credit would be applied to purchases of used electric vehicles.
5. Alternative energy. According to The Washington Post³ , there are also immediate tax incentives for consumers to install solar panels, efficient heat pumps, and electric induction cooktops, among other changes around the home.

Taxes

6. IRS Expansion. The Inflation Reduction Act includes an $80 billion increase in funding for the IRS over the next 10 years. The boost in funding is anticipated to be used to expand tax enforcement, likely through boosting staffing levels. It remains to be seen how this will play out, but according to Kiplinger the agency has stated that it intends to focus on high-earners, large corporations, and complex partnerships.⁴ However, that’s not to say small business owners or lower-income individuals won’t be affected.
7. Stock buybacks. The law imposes a 1% excise tax on stock buybacks, and according to The Washington Post⁵ , it’s expected to raise $74 billion over the next 10 years. This could encourage firms to return excess cash to shareholders via dividends.
8. Individual impact. On an individual level, the Tax Policy Center’s⁶ analysis says that it is anticipated that likely there will be no changes for the overwhelming majority of Americans on how much they pay in federal income taxes.

Although it may not impact their taxes directly, this conversation could provide an opportunity to go over important tax-related subjects with your clients, including, but not limited to some of the benefits of tax-deferred investing and what they can do once they start taking required minimum distributions.

Retirement and inflation

9. Green stocks. Financial professionals should consider how the law’s focus on green energy could impact their clients’ stock portfolio. Analysts at Kiplinger⁷ point to companies such as Tesla and Albemarle*, who produces the lithium used in car batteries, as possibly getting positive momentum thanks to the push for electric vehicles.
10. Expert insight. Paula Campbell Roberts, Head of Global Consumer & Real Estate Macro & Thematic Investing at KKR suggests: “No consumer has been sheltered from inflation this year. Americans across regions and income cohorts are bearing the burden, but some are facing higher cost increases than others. While most economists are focused on the high- and low-income consumer dichotomy, it is the middle class that is enduring the highest inflationary pressures, albeit by a small margin.”

The final say

Ultimately, the impact the legislation may have on your clients will vary. On an individual level, there are certainly cost-saving measures — the potential for cheaper electric vehicles, prescription drugs, and health care costs — that may have a positive effect on their financial plans. On a macro level, experts are divided.⁸ Some analysts speculate that impact of new corporate taxes could be minimal. However, Catherine Schultz, vice president of tax and fiscal policy at Business Roundtable told CNBC that such a policy could impact how corporations do business in the future, and making them less likely to take risks in their investment.