On Aug. 7, the Senate approved the Inflation Reduction Act via the budget reconciliation process. The act is geared toward tackling climate change, making prescription drugs more affordable and taking steps toward raising taxes on some of the largest and most profitable corporations.
Most of the sweeping and significant tax increases on individuals and small businesses were not included in the latest piece of legislation to be considered in Congress.
But the law as written does contain provisions that could significantly affect both individual taxpayers and corporations.
While it remains unclear whether the act will pass in the Senate in its current form, it does appear likely that some version of the law will pass — meaning that advisors should start to familiarize themselves with the provisions to add value for clients going forward.
Health-Related Provisions for Individual Taxpayers
The American Rescue Plan, or ARP, expanded the premium tax credit rules to provide a more generous Affordable Care Act benefit for 2021 and 2022. Under the normal rules, the premium tax credit is available to taxpayers with household income between 100% and 400% of the federal poverty level.
The ARP essentially eliminated the upper income limit and increased the amount of the premium tax credit by decreasing the percentage of household income that individuals are required to contribute to their health insurance coverage.
Under the ARP, the percentage rates ranged from zero to 8.5% of household income (down from between 2.07% and 9.83% in 2021 under prior law) regardless of how much a family earns.
In other words, even taxpayers with household income that exceeds 400% of the federal poverty line could be eligible for a credit if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income.
The Inflation Reduction Act would extend these rules and lock in the ARP's rates through 2025. The provision is designed to prevent millions of Americans from losing health coverage under the expanded ARP rules.
