Inflation is one of the United States’ most significant challenges. Currently, inflation pressures continue to weigh on the economy, with the core inflation rate up by 6.6% in just 12 months, the biggest gain since 1982. The increase in inflation has caused a large jump in food, energy, shelter, transportation, and medical care prices. The average American worker will continue to feel the effects of the rising costs in 2023, with their hourly earnings down by 3% from a year ago.
The Inflation Reduction Act, signed by President Joe Biden in August, is a landmark federal law that aims to curb inflation by reducing the government budget deficit and adjusting current tax laws. The reforms stipulated by the Act are designed to address climate change, healthcare, and corporate taxation. This is good news for American taxpayers as they ring in 2023. But before making any considerable changes to your finances, it’s vital that you understand how this new law will affect your tax bill.
Today, we’ll discuss the recent U.S. tax adjustments and how they can affect you in 2023:
The Act is part of the federal government’s body of policies aimed at addressing the climate crisis. It includes incentives designed to address climate change by providing tax credits for renewable energy:
Until 2032, homeowners are provided with up to 30% tax incentives when they add solar or wind power systems, energy-efficient water heaters, heat pumps, and HVAC systems to their homes. Homeowners who make these purchases may qualify for tax rebates worth up to $14,000.
For Vehicle Owners
The tax credit for the purchase of electric vehicles is extended until December 2032. Qualified buyers of new electric cars will receive an immediate $7,500 credit, while buyers of used electric vehicles will get a $4,000 tax rebate. Married couples filing jointly with income less than $300,000 per year and single tax filers with income under $150,000 are eligible for the credits.
The Act also has subsidies targeted to address the growing cost of healthcare through tax adjustments:
Affordable Care Act premium subsidies
The Inflation Reduction Act has extended subsidies for health insurance under the Affordable Care Act (ACA) through 2025. This extension is expected to benefit 13 million Americans who purchase their insurance under the ACA.
Prescription drug prices for seniors
The new law allows Medicare to negotiate drug prices and institute payment caps for its beneficiaries. Beginning in 2023, the program will cover only 10 specific drugs on the list of the most commonly used medications. By 2025, the list will expand to 20. This is designed to lower the cost of medications for beneficiaries.
The Act has created changes in corporate taxation:
15% corporate minimum tax
Currently, most U.S. corporations with profits exceeding $1 billion are subject to a 21% corporate tax rate. However, many firms pay either little or no federal tax under the current law. Under this change, which applies to taxable income beginning January 1, 2023, a new minimum 15% tax would apply based on annual income posted in a corporation’s financial statement rather than taxable income.
To keep up with the constantly changing laws, you must prepare for these tax adjustments. Here are two ways you can do so:
1. See a tax specialist
If you have questions about how to file your taxes or what information you might need to report on them, a tax specialist can help guide you through the process. These professionals understand the intricacies of tax rules and can provide strategic guidance on tax planning, monitoring, and compliance based on updated laws and regulations.
2. Review your financial records
Checking your financial records from the past year for accuracy and completeness is one way to implement a tax planning strategy for 2023. If any missing pieces of information could affect how much money you owe in taxes or how much of a refund you’ll receive based on the new laws, now is the time to find them.
Tax laws are constantly changing, and it can be challenging to stay abreast of them. Understanding how they work and knowing the new changes that could happen in 2023 and beyond can help you prepare for when you file your next tax return.