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Inflation Reduction Act of 2022

by | Dec 9, 2022 | The Ship's Wheel

 

Jay and I have reviewed the Inflation Reduction Act. So, how might the Inflation Reduction Act affect you? Most likely, not much.

There have been some scary headlines about thousands of new IRS agents being hired. I am not a fan of the IRS, but I am a fan of my kids, Finn (14 years old) and Ella (7 years old). I don’t want them paying extra taxes because others cheated. I suspect you don’t want your loved ones paying more because others cheated. The new agents should catch some tax cheats and cause others to not cheat. Our advice remains unchanged: Don’t do anything you wouldn’t want the IRS to ask you about. (Besides, I wouldn’t look good in an orange prison jumpsuit either.)

The Act also appropriates money to increase call center service levels and update computer systems. Fun Fact: the IRS is still running computers on Cobol, a computer programming language created in 1959. Just how much 1959 era technology are you using? Me neither.

Let’s look at the things that might more directly impact you.

Medicare
Under the Act, Medicare can negotiate prescription drug prices on some drugs, so Medicare recipients will get free vaccines, a $35/month cap on insulin starting 2023, and caps out-of-pocket drug costs for Medicare Part D members at $2,000/year in 2025.

Energy Efficiency
The legislation also includes energy efficiency incentives through federal tax credits (the so-called 25C tax credit). You can enjoy a tax credit equal to the lesser of $1,200 or 30% of the cost of the installation of things like solar panels, wind turbines, or geothermal systems. There are sub limits for other items: $600 for some air conditioners, water heaters or boilers; $600 for windows and skylights; $250 for an exterior door; $500 for multiple exterior doors; and $2,000 for heat pumps and biomass stoves (whatever those are).

The tax credit goes into effect on January 1, 2023, and runs through the end of 2032. Because of the relatively low cap, you could spread out projects over multiple tax years – insulation one year, windows the next, and doors the third. A tax credit, unlike a tax deduction, reduces your taxes dollar-for-dollar. If you were going to remodel anyway, the tax credits are a nice little extra, but not enough to get me to undertake a project I wasn’t going to start anyway. Remind your tax preparer to file IRS Form 5695 to receive the credit.

Last, there is up to a $7,500 tax credit for purchasing certain types of electric vehicles (EVs). To qualify the cars must be manufactured in the US by a company that has sold less than 200,000 EVs. There are battery mineral source and manufacturing requirements starting in 2023 to qualify for the credit.

 

Am I eligible to Convert my Traditional IRA to a Roth IRA?

Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.

For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.

This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].

Jay Chapman| CFP®

Jay Chapman| CFP®

Founder

Jay Chapman, CFP®, is founder of Chapman Capital Advisors, as a member of the advisory team. He has over 20 years of experience in the Financial Services industry.

Will Thompson | CFA®, CFP®, AIF®

Will Thompson | CFA®, CFP®, AIF®

Advisor

Will provides the in-house expertise of CFP®, CFA®, and AIF® that is uncommon for boutique firms.


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