Ways to Capitalize on the Inflation Reduction Act in 2023

In the summer of 2022, President Joe Biden signed the Inflation Reduction Act into law. Like most bills, it went through numerous iterations and names before the final draft was signed.

So what's in the act that may affect you in 2023 and beyond?

Areas making a tax impact

Mike Deming, Wealth Planning Practice Leader at First Citizens, says people may find benefits if they're considering energy-efficient home improvements or car purchases. For 2023, the Inflation Reduction Act also includes many provisions that affect healthcare expenses—specifically for those on Medicare.

However, he adds that just because an opportunity is available doesn't mean it's the right financial move to make. You should consider both the short- and long-term costs of any financial decision.

Finding tax credits for energy-efficient purchases

If you're in the market for a new or used car, the Inflation Reduction Act authorizes up to a $7,500 tax credit on the purchase of a new electric vehicle, or EV. In many ways, it's an expansion of the existing clean vehicle credit, but some auto manufacturers that were exempt from that act are now eligible for this one.

Still, it comes with several requirements based on where parts were sourced and assembled, as well as vehicle price limits and eligibility income caps. There's also a tax credit available for used-vehicle purchases with its own required conditions.

Do I qualify for the new EV vehicle tax credit?

According to PlugInAmerica.org, there are three requirements for the new EV vehicle tax credit.

• Battery components and critical minerals must meet certain location requirements, and final assembly must be done in North America
• Cars must be under $55,000, and SUVs, vans and pickup trucks must be less than $80,000
• There's an income cap of $150,000 for single filers, $250,000 for heads of household and $300,000 for joint filers

Tax credits for home upgrades

Tax credits may also be available if you're considering an energy-efficient home upgrade, such as installing solar panels. The Inflation Recovery Act allows homeowners to recover 30% of the cost of installing a solar energy system in the form of tax credits.

If you had a solar installation in 2022, you're in luck because the act is retroactive—meaning you also could qualify for the tax credit. While there was already a tax credit in place, it was initially 26% for 2022 and was slated to be reduced further in future years before the Inflation Reduction Act was passed.

The value of tax credits

Deming says the legislation is significant for consumers in part because it rewards with tax credits as opposed to tax deductions. Tax credits are more valuable than tax deductions because a credit takes the full amount off your tax bill.

A deduction, on the other hand, reduces your taxable income, so the net impact on your tax bill is less. Deming notes, however, that consumers don't need to jump into a purchase or project if it's not the right time for their budget.

Managing lower healthcare costs

The Inflation Reduction Act's goals include encouraging clean energy and managing the costs of healthcare. From the healthcare side, the act puts several actions into play around Medicare. Analysts say these provisions could eventually help those on private insurance plans as well.

The Medicare changes will roll out over several years. In 2023, insulin copays will be capped, and pharmaceutical companies will begin to have to pay rebates to Medicare if drug prices rise faster than the inflation rate. In 2024, additional provisions include a cap of 6% on Medicare Part D premium increases. And starting in 2026, Medicare will be able to negotiate the price of some drugs with their manufacturers.

For those not on Medicare but purchasing insurance through the marketplace via the Affordable Care Act, the Inflation Reduction Act extends tax credits that were set to expire at the end of 2022. Subsidies increased, and eligibility expanded to anyone making up to 400% of the federal poverty line.

Some organizations believe that because so many people are on Medicare or are getting insurance through the Affordable Care Act marketplace, the changes will eventually trickle down to better benefits for those on private insurance as well.

Taking advantage of the Inflation Reduction Act

Deming says it's important for people to consider the impact of a new car purchase or home improvement separately from the credit and not necessarily immediately pursue something. "Some of these credits are recurring, so it's not just a one-time thing," he notes. As an example, he says the solar tax credit is scheduled to last for 10 years.

"It doesn't mean you have to be paralyzed in making a decision, but just be cautious and think it through," Deming adds. "The car you're purchasing—is it something that makes sense for you overall? Are you going to enjoy it? Is the home improvement project going to increase the value of your home?" Think about the long-term impact of any decision and not just the tax credits associated with it.

When it comes to any large purchase, consider how much you'll be paying up front and what the financing will be for the remainder. The cost of installing a solar panel system on an average-size home in the US varies by state but is typically between $12,000 and $15,000 before tax credits. Will you pay this in cash or potentially have to pay interest if you charge it to a credit card or take out a loan?

As interest rates rise, the total amount you pay on any financed costs will also increase. A car is no different—but on an even larger scale in most instances.

Christy Bencivenga-Burns, a Mortgage Broker at First Citizens, suggests checking to see how much equity you have in your home because values have increased dramatically over the past few years. Some financial institutions offer home renovation loans that can be used for permanent home improvement projects, such as a solar panel installation.

Tapping into this equity through a home equity line of credit may be another option to give you a lower interest rate than using a credit card, especially if you don't want to use that much of your cash on a home improvement project.

Deming suggests always looking at the impact of purchases on both a short- and a long-term basis. Installing solar panels, for example, may increase the value of your home when you decide to sell it. One analysis prior to the pandemic, for example, found that homes with solar panels sold for 4.1% more than comparable houses.

Avoiding misinformation

Prior to the passage of the Inflation Reduction Act, a lot of news coverage was devoted to its less successful precursor—a set of proposals called Build Back Better. Deming says it's important to know that while some elements of Build Back Better made it into the Inflation Reduction Act, none of the individual income tax increases or capital gains tax increases proposed in Build Back Better were part of the new Inflation Reduction Act that actually passed.

"Some clients think most or all of those provisions are in there," he says. "They just heard so much about Build Back Better in 2021, and a lot of people thought it was a foregone conclusion that most—if not all—of those provisions would pass."

Many didn't. So before making any significant changes to your financial strategy, talk to your tax advisor, financial advisor or a First Citizens banker to be sure you understand exactly what's changing as a result of the Inflation Reduction Act. They can help ensure that any moves you're considering are right for you both now and in the future.