H.R. 5376: Provisions of the Inflation Reduction Act

On August 16, 2022, President Joe Biden signed H.R. 5376, the Inflation Reduction Act of 2022. The legislation aims to lower healthcare costs, invest in domestic energy production and climate change mitigation, and increase federal tax revenues from large corporations. Through these changes, the law also seeks to reduce the federal government’s budget deficit over the next decade.

The act introduces new policies and financial incentives, empowering the government in healthcare while creating tax credits to encourage investment in clean energy. The revenue for these initiatives is generated primarily through new corporate tax provisions. These interconnected reforms will unfold over the coming years, impacting corporations, individual taxpayers, and federal healthcare programs.

Corporate and International Tax Reforms

A revenue-generating component of the Inflation Reduction Act is the 15% Corporate Alternative Minimum Tax (CAMT). This tax applies to corporations that report over $1 billion in average annual financial statement income, or “book income,” over a three-year period. This tax addresses situations where large, profitable companies have used deductions and credits to pay little to no federal income tax under the standard system.

Book income is the profit a corporation reports to its shareholders in financial statements, calculated according to Generally Accepted Accounting Principles (GAAP). Taxable income is the figure calculated following the Internal Revenue Code, which allows for various deductions and credits that can lower a company’s tax liability. The CAMT creates a tax floor, ensuring that if a corporation’s regular tax liability falls below 15% of its book income, it must pay the difference.

Another corporate tax change is a 1% excise tax on the net value of stock repurchases, or stock buybacks. A stock buyback occurs when a company buys its own shares from the market, which can increase the value of the remaining ones. The tax is levied on the fair market value of the stock repurchased by a publicly traded corporation, adjusted for any new stock issued during the same year.

The rationale is to create a disincentive for using profits for buybacks, which benefit shareholders, and instead encourage companies to reinvest earnings into their operations, such as through research, development, or increased wages. The tax is applied directly to the corporation conducting the buyback.

Healthcare Cost and Coverage Provisions

The Inflation Reduction Act changes federal healthcare policy, focusing on reducing prescription drug costs for Medicare beneficiaries. A provision grants the federal government the authority to negotiate prices for certain high-cost prescription drugs. This applies to select single-source drugs under Medicare Part D and Part B. The process is phased, with the first 10 Part D drugs subject to negotiated prices in 2026, 15 more in 2027, another 15 in 2028, and 20 more in 2029 and subsequent years.

Starting in 2025, the law establishes a $2,000 annual cap on out-of-pocket prescription drug costs for individuals in Part D plans. This provides a financial safeguard for beneficiaries with high drug expenses, as they will not be responsible for costs above this threshold for the rest of the year. This builds upon a 2024 change that eliminated the 5% coinsurance requirement in the catastrophic coverage phase.

The act also addresses insulin costs for those on Medicare, capping out-of-pocket costs at $35 for a month’s supply. This provision applies to all insulin products covered by a beneficiary’s prescription drug plan or Medicare Part B and took effect in 2023.

Beyond Medicare, the legislation extends financial assistance for those buying insurance through the Affordable Care Act (ACA) marketplace. Enhanced premium tax credits, first expanded under the American Rescue Plan Act, were extended through 2025. These subsidies lower monthly premiums by capping a household’s contribution toward their premium at no more than 8.5% of their income.

Energy Security and Climate Change Investments

The Inflation Reduction Act authorizes a major federal investment to combat climate change and improve domestic energy security, primarily through tax credits for individuals and households.

Clean Vehicle Credits

The Clean Vehicle Credit provides a tax credit of up to $7,500 for purchasing a new qualifying electric vehicle (EV). To be eligible, vehicles must have a manufacturer’s suggested retail price (MSRP) below $80,000 for vans, SUVs, and pickup trucks, and $55,000 for other vehicles. The credit also includes sourcing requirements for battery components and critical minerals to encourage a domestic EV supply chain.

Buyer eligibility is limited by modified adjusted gross income (MAGI), which cannot exceed $300,000 for married couples filing jointly, $225,000 for heads of household, or $150,000 for other filers. A separate credit of up to $4,000 is available for buying a used clean vehicle with a sales price cap of $25,000 and lower income limits.

Homeowner Credits

For homeowners, the act expands credits for energy efficiency upgrades. The Energy Efficient Home Improvement Credit provides a tax credit for 30% of the cost of qualifying improvements, with a $1,200 annual limit. This credit can be used for projects like new windows, doors, insulation, or a home energy audit. Certain equipment, like heat pumps and biomass stoves, is eligible for a higher credit of up to $2,000 per year.

Another incentive is the Residential Clean Energy Credit, which provides a 30% tax credit for new, qualifying clean energy property. This covers systems like solar panels, geothermal heat pumps, and battery storage technology. The 30% credit rate applies to property placed in service through 2032, then phases down to 26% in 2033 and 22% in 2034.

Commercial Incentives

On the commercial side, the legislation provides incentives to stimulate domestic clean energy manufacturing. It extends and modifies the Investment Tax Credit (ITC) and Production Tax Credit (PTC), the main federal incentives for clean energy projects. Standalone energy storage and other zero-emission technologies are now also eligible for these credits. The law also introduces bonus credit amounts for projects that pay prevailing wages, use registered apprentices, or are located in designated “energy communities.”

Internal Revenue Service Funding and Enforcement

The Inflation Reduction Act allocated long-term funding for the Internal Revenue Service (IRS). While the act originally provided approximately $80 billion, subsequent legislation reduced this amount by more than $40 billion. This investment addresses years of budget cuts that diminished the agency’s capacity, with the remaining funds divided among four categories.

A large portion is dedicated to enforcement activities to increase tax compliance and close the “tax gap,” which is the difference between taxes owed and paid. These funds support hiring more revenue agents and expanding audits of complex tax returns. A Treasury Department directive states this funding should not increase audit rates for small businesses or households with incomes below $400,000 per year.

Another portion of the funding is for improving taxpayer services. This investment aims to modernize the taxpayer experience by upgrading customer service, expanding digital options, and speeding up the processing of returns and refunds. The goal is to make it easier for compliant taxpayers to navigate the tax system and resolve issues with the agency.

The remaining funds are for operations support and business systems modernization. Operations support covers the costs of running the agency, while modernization funding is for overhauling the IRS’s outdated technology infrastructure. This includes replacing legacy computer systems to improve data security and create a more efficient tax administration system.