The Inflation Reduction Act, signed into law in August 2022, focuses on two primary things. The first is climate change, by virtue of several tax credits and incentives for businesses and consumers to redirect their funds to more energy-efficient options. The second involves making Medicare-related changes, and that’s the piece we’ll focus on here.
The cost of healthcare continues to rise, and senior retirees bear the brunt of those increases. After all, age tends to bring more health problems demanding more prescriptions and hospital visits, all while living on a fixed retirement income.
The Inflation Reduction Act intends to help people on Medicare who spend money out of pocket on medical costs, but many of the changes won’t come on board for several years. Here are the four main changes that could impact healthcare costs for retirees.
1. Negotiated Drug Prices
The Act allows Medicare to haggle and negotiate drug prices under Part D. The problem is this ability isn’t as broad as most people think. In fact, it’s quite limited and really only impacts the most expensive drugs. It also has a very slow rollout, covering about 10 drugs starting in 2026. This goes up in 2027 to 15 drugs and increases again in 2029 to 20 drugs.
While these changes are still a ways off, some estimates project that negotiated drug prices will save about $100 billion. This is supposed to trickle down to seniors as lower Part D premiums, but we’re skeptical about that.
2. Capped Out-of-Pocket Drug Costs
The Inflation Reduction Act caps annual out-of-pocket drug costs at $2,000 for people on Medicare Part D. About 1.4 million seniors spend more than that, so this change certainly benefits them. The problem is the cap doesn’t take effect until 2025.
3. Limit on Insulin Prices
If you purchase insulin, you know the price has been skyrocketing. US residents pay about 10 times more for insulin than people in other developed countries. The Inflation Reduction Act takes direct aim at this by stipulating that Medicare users will pay a maximum of $35 per month out of pocket for insulin. The good news about this feature is that it kicks in as early as January 2023.
4. Free Vaccines
All vaccines for people on Medicare are free starting in 2023. Of course, the flu and COVID-19 vaccines are already free, but things like the shingles shot aren’t. The idea is to make all vaccines a free part of preventative healthcare for seniors.
Only time will tell what the ripple effects of the Inflation Reduction Act will be. After all, there’s no such thing as a free lunch.
Tax Changes in 2022
In the past three years, we’ve had tons of new tax changes, tax credits, and stimulus checks to juggle. What are some of the tax changes in 2022?
- Tax income bracket increase: This is a change we expect every year. In 2022, tax brackets are increasing by 3 to 3.8 percent across the board.
- Child Tax Credit: In 2021, families received a tax credit of $3,600 per dependent child under age 17. For 2022, this is dropping back to the regular $2,000.
- Dependent Care Qualified Expenses: Income-eligible families can deduct up to 35 percent of the cost to send kids under 13 to daycare, babysitters, after-school programs, and summer camps. In 2021, the limit was $8,000 for one child and $16,000 for two or more children. This year, it’s dropping back to the regular rate of $3,000 for one child and $6,000 for two or more children.
- PMI deductions: Itemized tax deductions for private mortgage insurance (PMI) premiums were set to expire in 2020, but the Consolidated Appropriations Act extended this through 2021. Congress has now extended this to 2022, allowing you to deduct PMI premiums as part of the mortgage interest itemized deduction.
- Charitable giving deduction: Contributions to charity have always been itemized deductions. However, in 2021, individuals taking the standard deduction could claim an additional $300, and married couples could claim $600 for gifts to charity. This has gone away for 2022, meaning you must itemize your deductions to get any tax benefits for your charitable contributions.
- Increase in virtual currency transactions reported: Currently, many cryptocurrency transactions do not generate official tax forms. But in 2023, the IRS will begin sending out these documents, similar to the way they track stock transactions. In preparation for this, many companies have started issuing documentation this year to work out the kinks on their end.
- Enhanced business meal deductions: Write-offs for business meals have been in place for years. The rate used to be 50 percent, but for 2021 and 2022, the enhanced deduction allows you to claim 100 percent of business-related food and beverage purchases from restaurants.
- Form 1099-K: This tax form is issued for any reportable credit or debit card transactions or third-party network transactions for goods and services. Examples include selling things on Etsy, eBay, or Amazon or accepting payments through networks like PayPal or Venmo. In the past, 1099-Ks were issued for $20,000 or more in gross sales. For 2022, this is dropping down to $600.
- Business mileage: The standard mileage rate for business travel was 58.5 cents per mile at the start of 2022, which increased to 62.5 cents for the final six months of the year. Similarly, medical mileage started at 18 cents per mile but increased to 22 cents for the latter half of the year. Charitable mileage for volunteering remains unchanged at 14 cents per mile.
- Retirement plan contribution limits: The limit for 401k plans is going up by $1,000 to $20,500. The catch-up limit for contributors over age 50 is $6,500. Traditional and Roth IRAs are staying at $6,000 per individual, with a $1,000 catch-up for contributors over 50. SIMPLE IRA plans got a little bump to $14,000 per year, with an additional $3,000 if you’re over 50.
Contact Nelson Financial Planning
If you’re wondering how upcoming Medicare and tax changes could affect you, turn to Nelson Financial Planning to learn more. Our Certified Financial Fiduciaries would be happy to help you build a successful financial plan that provides peace of mind for the future.
For more information, please contact us online or call our Winter Park, FL, office at 407-629-6477.
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