Gift Planning and the Inflation Reduction Act of 2022

Bernie Sanders has been the butt of some memes, but the picture above may summarize the exhaustion around the Inflation Reduction Act of 2022. Senator Sanders was taking a break from the Vote-a-Rama during passage of the bill in the Senate. The measure passed the Senate and House and was signed into law by President Biden on August 16, 2022. The legislation represents a major shift in healthcare, climate, and taxation policy.

What, if anything, does the bill mean for gift planners? Directly, it doesn’t mean much. Indirectly, the law may affect some donor behavior, which is something gift planners should consider.

Corporate Taxation

A significant provision is a new minimum tax designed to ensure that large corporations pay at least 15 percent of their profits to the federal government. This provision could collect $313 billion in taxes on these corporations over 10 years. It also includes a 1% excise tax on stock buybacks by publicly traded corporations.

Although these proposed taxes do not directly raise taxes on individuals, some commentators argue that higher business taxes could impact individuals by reducing profits for shareholders or through lower wages paid to workers. Economists disagree about how much of corporate tax increases is passed on to shareholders or workers. Nonetheless, the new corporate minimum tax is likely to fall mainly on high-income individuals who own stock, many of whom are significant donors to charitable causes.

Prescription Drug Plan

The bill’s prescription drug plan would allow Medicare to negotiate the prices of certain drugs used by many seniors. It would cap out-of-pocket drug costs for Medicare beneficiaries at $2,000 a year beginning in 2025 and limit insulin costs for Medicare patients to $35 a month starting next year.

But aren’t all of our donors wealthy enough that they don’t worry about the cost of medicine? The reality is that many substantial bequests and other estate gifts come from those considered solidly middle class. Prescription drugs can cost tens of thousands of dollars for older Americans. The limitation on drug costs will help preserve wealth for these important planned gift donors.

IRS Investment

The bill includes an $80 billion increase in the budget of the Internal Revenue Service. The IRS has been under resourced for years. Proponents suggest the money will be used to target high income individuals for enforcement, and critics worry that all taxpayers will become targets. We can disagree on the enforcement of tax law, but inadequate IRS resources has led to slow return processing, delayed refunds, and poor customer service.

If you’ve ever had a tax question related to charitable planning and reached out to the IRS, you understand the scale of the problem. Emails go unanswered, phone calls entangle you in voice mail hell, and even if you reach someone, chances are they know little about charitable planning. Proactive enforcement may reduce the questionable giving schemes peddled by some promoters. Overall, increased IRS resources is mostly good news for gift planners.

Conclusion

We haven’t mentioned the centerpiece of the Inflation Reduction Act, the largest investment in addressing climate change in American history. While important and historic, it’s not probable that these provisions will immediately affect donor behavior.

The changes to corporate taxation may not have a real impact on philanthropy from the highest net-worth donors, but it’s also true that perception is reality. Because charitable giving is voluntary, wealthy donors who initially feel “poorer” may adjust their giving accordingly. However, over time as we've seen before, these donors are likely to adjust to the new reality and resume their previous pattern of giving.