Manchin - Schumer Tax Update: Inflation Reduction Act - Now Passed


From 'Build Back Better' to 'Inflation Reduction'

On August 15, 2022, President Biden signed the Inflation Reduction Act into law, which is based largely on the compromise agreement reached between Majority Leader Charles Schumer and Senator Joe Manchin. The Act sanctions a $739 billion tax-and-spending package that includes some targeted corporate and individual tax increases, a large increase in funding for the Internal Revenue Service (IRS), incentives to promote climate change mitigation and clean energy, and provisions to promote health care affordability. Accordingly, the Act is now named the Inflation Reduction Act of 2022 replacing the Build Back Better mantra.

Here we look at what is in the new Act and, perhaps more interestingly, what is not.

Key Takeaways – What Is Included in the Act

  • A 15% minimum tax rate for very large corporations (Net Income > $1B).
  • A 1% excise tax on corporate share buy-backs.
  • Increased funding of the IRS by $80 billion over 10 years for more robust enforcement and compliance measures targeted at the “ultra-wealthy” and big corporations.
  • Cap at $2,000 the annual “out-of-pocket” expenses payable for those covered by Medicare and allow Medicare to negotiate drug prices directly with pharmaceutical companies.
  • Extension, through 2025, of the current premium-assistance credit under the Affordable Care Act for those who access health insurance through a government exchange.
  • Provides tax credits for a wide range of green energy projects and infrastructure, including a means-tested tax credit of up to $7,500 for those purchasing a new electric vehicle and up to a $4,000 credit for those purchasing a used electric vehicle.

Key Takeaways – Previous Proposals NOT Included in the Act

  • No increase to any income tax, capital gains tax or investment tax.
  • No taxation of long-term capital gains at ordinary income rates.
  • No end to the step-up in basis for inherited assets.
  • No taxation or realization for appreciated assets gifted or assets transferred to a trust.
  • No change to the Unified Lifetime Gift and Estate Tax exemption amount of $12.04M.
  • No change to 1031 exchanges or Qualified Small Business Stock (QSBS).
  • No change to the state and local tax (SALT) deduction of $10,000 for individuals.
  • No taxation of unrealized gains for the Ultra Wealthy ($100M+).
  • No shutting down of various vehicles used in estate planning, such as Grantor Trusts, Charitable Remainder Trusts, Grantor Retained Annuity Trusts (GRATS), Spousal Lifetime Access Trusts (SLATs) or Family Limited Partnerships.

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