In September, the government passed the "Inflation Reduction Act." Today Bruce Hosler of Hosler Wealth Management breaks down the key pieces of the legislation and how it can affect you going forward. We break it down into 9 key areas:
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The Inflation Reduction Act - What does it mean for you?
Jon: Welcome back to Protecting and Preserving Wealth. I am Jon Jag Gay. Joined as always by Bruce Hosler of Hosler Wealth Management. Bruce always good to be with you.
Bruce: It's good to be with you, Jon. What a beautiful day we have before us.
Jon: And what a beautiful thing we're talking about potentially here. That is the Inflation Reduction Act.
We're recording this on September 14th. This was passed pretty recently to this recording. The Inflation Reduction Act. We're talking today about what that means for our listeners. Let's start off with something that's probably near and dear to a lot of our listeners, and that's the healthcare premium tax credit.
What has changed with the Obamacare tax credit in this new legislation?
Bruce: Yes. So, as everyone remembers Obamacare, they get a credit depending on their circumstances financially, on how much that credit is. Well, prior to the pandemic, the credit was available to people with income between 100% being equal with the poverty level, and 400%.
Now, the new American Rescue Plan has expanded these to allow people with 400% of the poverty line, to get some credit amounts and they were increased. And now this new inflation reduction act that we're talking about today.
Bruce: Has extended these tax credits through 2025 in an expanded form. In fact, let me tell you, Jon, we ran the math for a couple that had income of 300,000.
They were 60 years old in Arizona. They could qualify for $7,000 worth of the credit under this new plan. It's amazing.
Jon: Yeah, that is amazing. And that's great because I think there is probably a stereotype that, that it's only available to those that are "low income," but this might be available to folks that are a lot more, uh, income than we would've thought.
Bruce: Right, now, one of the requirements is you have to be getting your insurance off of the marketplace, so you have to be shopping for one of those government plans, but this is amazing what they've done, and so, basically we're all being kind of herded to get this tax credit and take advantage of this new benefit, the premium tax credit for health insurance. So, that's one of the first parts of the Inflation reduction Act.
Jon: You mentioned the marketplace. Does that include Medicare, Medicaid, or is that something we'll get into later?
Bruce: No, it's the health insurance marketplace. So Medicare recipients do not qualify for this, what we're talking about.
Jon: Okay. We'll get to more on that later. So, the home energy system tax credits are another piece of this. I know there was a big push to look at environmental stuff going forward, Green energy, things like that. Tell me about the home energy system tax credits.
Bruce: I want to be clear. We're talking about home energy systems. So wind turbines, solar panels, solar electric equipment, solar powered water heaters, along with all the installation and costs, including labor.
And by the way, let me just pause here. A credit is dollar for dollar. It's not a tax deduction, it's a tax credit. So, whatever you spend, you can get a credit dollar for dollar back. So, these credits for these systems, energy system starts in 2023. It can include the cost of a battery storage system as well is eligible.
It can be on your primary home or residence or on a vacation home or a second home.
Jon: Okay. Good to know.
Bruce: Also, they have increased the credit to 30% for 2022. So, if you start to do it before the end of the year, it goes all the way from 2022 to 2032 for 10 years. But in 2032 it falls to 26% and 2033, 22%, and 2034. And then after 2034, it drops to zero.
Jon: Unless something changes in the next 10 years. Okay. Good to know.
Bruce: Yeah, yeah. Imagine that Jon. Could something change?
Jon: Yeah, really. Okay, so I know we already had some energy efficient home improvement tax credits prior to this. What did Congress do with those?
Bruce: So, we still have them and they've been extended.
So, you get 10% of the cost of certain type of things like insulation, external windows and doors, skylights. A hundred percent of the cost of electric heat pumps and water heaters are eligible for the credit. Now this begins in 2023 folks. Not this year, 2022, but next year, and the credit is 30% of eligible costs with an annual limit of $1,200.
Now, let me repeat that. Annual limit.
Bruce: Now, if you're putting exterior windows in and skylights or exterior doors, the annual limit's only $600, but it's an annual limit. So if you wanna put your front door on one year, your back door on the next year, that's energy efficient. Then you can get the credit every year like that.
I don't think people want to go around their house and put a window in every year over the next 10 years, Jon, but there's a thought about having an annual limit that way.
Jon: Bruce, you said $600 at one point and $1200 at one point for the annual credit. The back there, is it.
Bruce: So, the $1200 was on the cost of insulation, plus external windows and doors and skylights.
A hundred percent of the cost of electric heat pumps and water heaters. So, The beginning years of 2023 to 2032, the credit is 30% of eligible costs with a maximum of $1200. Specifically though, for Windows, skylights and external doors is only 600 for skylights and Windows 500 for doors.
Jon: Got it. Okay. Thanks for clarifying that. Okay, lemme move on to electric vehicles. Everyone already knows about the tax credits for buying an electric vehicle, but some manufacturers like Tesla have already hit their production limit for buyers to qualify for the tax credit. Has that changed too?
Bruce: They took that away.
The manufacturer limits of 200,000 have been removed. However, there's some other requirements. The car must be finally assembled in North America. North America doesn't mean United States folks, it can include Canada.
Bruce: and Mexico. And they have adjusted the gross income limit thresholds. So $300,000 for joint filers.
$125,000 for single on the new cars. Now, the maximum credit is still $7,500.
Bruce: Now, a new thing, Jon, is they're also allowing a credit for used vehicles. So, you can get up to $4,000 or 30% of the vehicle sales price. So that's going into effect for this begins in 2023. So those will begin at the beginning of the year.
Jon: Got it. Okay. I know a big question that a lot of our listeners have with regard to this new legislation is gonna be about tax increases. Who are these tax increases going to affect Bruce?
Bruce: So, that's a great question. Really, folks, these tax increases affect companies who have an average of over a billion dollars in annual income over a three year period.
It also affects the companies that are doing stock buybacks. They'll pay a 1% excise tax. Then there's a cap on write-offs for businesses with losses on individual returns. So, if you're an owner and you have a pass through business and your individual loss is more than $540,000, you're capped out. You can't lose more than that.
That doesn't affect most of our listeners. But for a business owner that had a really bad year with everything going on with the pandemic and that, that could affect them. The one thing that will affect our listeners that everyone needs to pay attention to is the annual gift tax exclusion. Now,
Bruce: What that is, Jon, is every year you can give someone $16,000 beginning in 2022.
But what came out in this new Inflation Reduction Act is that the check must be cashed by the recipient before the giver passes away. So if grandpa's on his deathbed in the hospital and he writes you a check,
Bruce: And you don't cash it, too bad. The gift doesn't count as a gift. But if you get to the bank before grandpa dies, then it's good and it meets the exclusion amount.
It's not included as a taxable gift.
Jon: So, I gotta imagine that's related to the state tax and inheritance and all that, that you wanna be done while the person is alive. But jeese Bruce, you're painting this morbid picture in my head of like, Hey, thanks to check grandpa, I know you're on your deathbed, but let me just run out and cash this and can you hang on for a few more minutes?
Not to be morbid, but that's kind of the picture you're painting.
Bruce: That's exactly what it is. It's a gift tax, so, it's not subject to gift tax or estate tax. It has to do with that. But what they had is where grandpa was on his death bed, he's writing now checks to all these family members, and then somebody sat on it.
Grandpa ended up passing away and the check had not cleared the bank yet, and the IRS is not allowing that. The check has to clear the bank while they're alive.
Jon: Interesting, I'm glad that's a good point of differentiation to make there. What about, uh, higher interest rates on overdue balances? What's affected here?
Bruce: So, the IRS historically has been matching kind of what the industry rates are, but as you know, interest rates have gone up recently, so they're increasing the rates of interest. If you owe the IRS money, the interest they're gonna charge you for the period of time that you haven't paid it timely- those are going up. For corporations who owe more than a hundred thousand.
It's up to six and 8% respectively. Overdue refunds- six and 5% for corporations if it exceeds $10,000. So, those tax increases on the interest that they're charging have gone up and the IRS is gonna come after you and want that.
Jon: Okay. Speaking of the IRS, I've seen a lot of, uh, sensational headlines about this act, putting more IRS ages in place, some of them with guns.
Explain what's really going on here for me if you could.
Bruce: So, 80 billion dollars, they're spreading out 8 billion dollars every year, and they've kind of broken it down. So, 45 billion for enforcement and collection, 25 billion for operations support, 4.8 billion for modernizing their systems, the telephones, and the technology.
And then 3.2 billion for tax payer services. Let me tell you, as a tax practitioner, Trying to call the IRS is a nightmare right now. I think it is for all the taxpayers. So, hopefully they're gonna create some more services for this.
Bruce: Jon, I have to tell you, there's only been one time in my life that I have seen a department show up from the IRS that's called C. I. D.
C. I. D. is the Criminal Investigation Division of the IRS and those gentlemen had guns strapped on their hips and their badges were on their waist. I've only seen them one time. It was a number of years ago. Well, apparently this 45 billion for enforcement collection majors is going to new officers that are gonna be C.I.D..
They're gonna pack heat. Pack guns. Have badges, and it seems like they're gonna get serious. They're going after taxpayers to make sure that you have paid all your taxes. I don't know what all that means, but I think we're gonna see that the IRS is gonna be a lot more active than they have in the past.
Jon: I wanna be careful here, Bruce, cause I wanna make sure we're not scaring the daylights out of our listeners here.
From what I understand that C.I.D. Division is really reserved for people who are alleged to have been committing some serious financial crimes. They're not gonna come to you guns blazing over an everyday person's audit I'd imagine.
Bruce: That's correct. Your interpretations are correct the way it's been in the past, but I don't know.
They've never hired this many agents and they've never purchased this many guns that we've heard that this is being publicized. I don't know if it's true or not, but 80,000 new agents is a lot of workers. Some of those, uh, may be packing guns, but in the past it was like they were coming after drug lords and people like that.
Jon: So, yeah.
Bruce: It's not regular Joe and Sally, I don't think.
Jon: Or regular not Jon and Bruce, I wouldn't imagine either, hopefully. I'm glad you mentioned how difficult it has been to reach the IRS, and I'm not gonna come on here and, you know, defend the IRS or anything like that, but people hear that, you know, Oh, this money's going to IRS agents.
There is some good here that maybe if you try to call the IRS, you'll actually get to an actual human being on the phone. I gotta imagine an upside here at actually have people's staff to answer questions when you've got an issue.
Bruce: We absolutely hope that that's the case, that they're better trained, they have better technology.
They can handle more phone calls. There's more people to answer the phone. I'm hoping that that's the case because we need services as well. Unfortunately, it doesn't seem like they're funding as much of that as we need, but I'm gonna withhold judgment until we give them a chance to see what they're gonna do with the money.
Jon: Fair enough.
And last point on the IRS before we wrap up here Bruce. New increased IRS audits. That seems to reason more money, more agents, more audits. That shouldn't be surprising, but have they told us who they're gonna be increasing the audits on?
Bruce: Yes, they have. So, the Treasury Department, the IRS, say that they're gonna audit big corporations and pass-through entities.
Now a pass through entity is a company that passes through the profits to the owners. So, think of a partnership, an LLC, an S corporation. So, you pay wages on a S corporation to the owner of the company, but if there's excess profits, they pass through on a K-1 form and report them that way. So, they're gonna be auditing those companies.
They're gonna be auditing high-net worth individuals, and I don't know what their definition of that is.
Jon: Oh, okay.
Bruce: So, uh, we'll wait and see who that is, but if you are high-net worth relative to the rest of the population, you might be getting some extra scrutiny. They're gonna be auditing cross-border activities, and I have to warn our listeners, cross-border activities mean if you have a foreign bank account.
So, if you have a foreign bank account, you have to file an F bar form every year reporting that bank account if it's over $10,000. And Fon is very interested in. So, folks, you need to make sure if you have out of country bank accounts that you're reporting those. And then finally, the thing that we see that they're really interested in is all this virtual currency transactions.
And the thing I need to caution our listeners about, Jon, is if you have virtual currency, and let's say you have it in an account and they give you a credit card and you wanna spend your Bitcoin or your other virtual currency from the date you bought it until the day you used that credit card to spend your Bitcoin, That is a holding period.
Is it long term? Is it short term? How is the reporting on this? It's all responsible by the taxpayer to report it properly to the IRS. And I saw on my Kipling letter the other day that the IRS has now changed the form 1040, and they're asking about virtual currencies on the front page of the 1040. So, they have a lot of interest in virtual currencies.
You need to be sure that you're reporting this correctly that will receive some scrutiny from the IRS with this new Inflation Reduction Act.
Jon: An example of the loss starting to finally catch up to the technology, I guess.,
Bruce: Yes, that's exactly the way to state it, Jon.
Jon: So, we've only had about 15 minutes here, Bruce.
We've really ticked off a lot of different aspects pretty quickly when it comes to the Inflation Reduction Act, or ironically initials are IRA, I'm sure that's not lost on you, but,
Bruce: Yes, the IRA.
Jon: If somebody wants to come talk to you and your team at Hosler Wealth Management about their specific situation or any of the aspects in the Act that we've just discussed today, what are the best ways to find you?
Bruce: So, you can find us on the web at Hosler HOSLERWM https://hoslerwm.com/. You can call us at Prescott at (928) 778-7666 or in Scottsdale (480) 994-7342.
Jon: Really important stuff today and again, very important to know about your individual situation. Bruce talk again in a couple weeks.
Bruce: Thanks Jon.
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