As seen in: Baird Wealth Management Perspectives
Here’s what you need to know:
Healthcare Cost Reductions
Several provisions in the new law are aimed at reducing healthcare costs. It puts price controls on drugs sold through Medicare, and starting in 2023, Medicare beneficiaries will also see price caps on certain out-of-pocket drug costs and co-pays. Starting in 2026, manufacturers will be required to negotiate price caps with the federal government on Medicare-offered prescription drug and insulin products.
In addition, the expanded Affordable Care Act (ACA) provisions included in the pandemic-relief bills in 2021 have been extended through 2025. These provisions essentially remove the income limit for taxpayers to qualify for the health insurance subsidy and shrink the percentage of income you are expected to contribute towards your health insurance premium.
Clean Energy Incentives
The Act expanded and extended a number of clean energy incentives already in place that could start to save you money right away. The existing home energy credit, which was scheduled to expire after 2021, has been extended through 2022, while an enhanced credit applies for qualified energy-efficient improvements installed between 2023 through 2032. So if you’re considering making improvements, it makes sense to wait until 2023 in order to qualify for the new larger credit.
If you install certain qualifying property (such as solar electric property and water heaters, geothermal heat pumps, battery storage technology, etc.), you will continue to receive a tax credit equal to 30% of the cost. This credit was previously scheduled to end in 2023, but has now been extended through 2034.
In addition to the existing tax credit of $7,500 for newly purchased qualified electric or hydrogen fuel cell vehicles, there is also a new credit for buying a used vehicle of this type, equal to 30% of the cost of the car, up to $4,000. The car must be at least two years old with a purchase price of no more than $25,000. Again, this takes effect in 2023, so if you’re in the market for an electric car, you may want to wait until next year.
Excess Business Losses
The excess business loss limitation for non-corporate taxpayers, which had been set to expire on January 1, 2027, has been extended to January 1, 2029. This limits your ability to deduct business losses to $500,000 per year (for married filing jointly; $250,000 for other taxpayers), with both amounts indexed for inflation.
And All Those IRS Agents
Almost $80 billion is being spent on IRS resources over the next 10 years, with $45.6 billion going toward enforcement activities, including tax assessment and collection. After a sharp decline in audits in recent years due to staff reductions and the increasing complexity of the tax code, the IRS plans to focus at least in part on flow-through businesses, high-net worth individuals, and multinational taxpayers with international tax exposure. One thing to keep in mind: The expected increase in audits will make proper record-keeping increasingly important.
What’s Not in There
Many much-discussed potential changes did not make it into the final bill. Some items that were not included:
- Increase in ordinary and capital gain tax rates
- High-income surcharge
- Extension of the enhanced child tax credit
- Extension and/or change to $10,000 state and local tax (SALT) deduction limit
- Medicare surtax expansion
- Elimination of the backdoor Roth strategy
- Deferral limitations on 1031 exchanges
- Creation of a new Wealth Tax
- Any changes to the estate tax system, including lowering the tax exemption, increasing the tax rate or limits on the use of certain trusts
There is much to take advantage of here, in addition to provisions to be wary of. To help make the best of the new tax changes, talk to your Baird Financial Advisor.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.