How the Inflation Reduction Act affects your finances

The Inflation Reduction Act includes everything from a tax hike on large businesses to extended subsidies for Affordable Care Act health insurance policies.

Here's a look at the provisions that could affect your finances.

Lower drug costs for seniors: Medicare will have the right to negotiate prices for prescription drugs for the first time since Congress enacted a prescription drug benefit for seniors in 2003. However, the authority won't extend to all prescription drugs.

Starting in 2026, Medicare will be allowed to negotiate prices for the 10 highest-cost drugs covered by Medicare Part D. The number will increase to 15 Part D drugs in 2027, 15 Part B and D drugs in 2028, and 20 Part B and D drugs in 2029 and beyond. The bill also includes a $2,000 cap on seniors' Part D out-of-pocket costs, starting in 2025.

The Kaiser Family Foundation estimates that 1.4 million Medicare beneficiaries had out-of-pocket drug costs of $2,000 or more in 2020. Seniors who rely on insulin to treat diabetes will also benefit from a provision that caps the cost of insulin at $35 a month.

Extended subsidies for Affordable Care Act policies: The bill extends through 2025 subsidies for health insurance plans purchased from the government's health insurance marketplace, HealthCare.gov. The subsidies, enacted in 2021 in response to the coronavirus pandemic, were scheduled to expire at the end of this year.

Those with income over 400% of the poverty level ($54,360 for single individuals; $73,240 for married couples) will be eligible for subsidies, and premiums will continue to be capped at no more than 8.5% of household income.The subsidies primarily benefit middle-income workers, who tend to pay a higher percentage of their income for health insurance, and older individuals, who are charged a higher premium for ACA policies. Without the extension, ACA policyholders faced "the steepest increase in out-of-pocket premium payments that most enrollees in this market have seen," the Kaiser Foundation said.

Credits for electric vehicles: To encourage more consumers to buy energy-efficient cars and trucks, the legislation extends the $7,500 electric vehicle tax credit for 10 years and applies it to significantly more vehicles. In the past, the credit was phased out after a manufacturer sold 200,000 vehicles, which had already affected EVs sold by General Motors, Tesla and Toyota. Now, the credits will be available for all eligible EVs through 2032. However, in order to qualify for the full credit, the EVs must meet standards designed to encourage domestic manufacturing, which could disqualify many existing models.

Buyers of qualified used EVs will be eligible for a credit of up to $4,000 or 30% of the price, whichever is lower. Buyers will be able to claim the credit when they buy an EV, either as a down payment or reduction in price.

There are income limits to be eligible for the credit. The new vehicle credit phases out if modified adjusted gross income exceeds $150,000 for singles or $300,000 for married couples. For used EVs, the thresholds are $75,000 for single buyers and $150,000 for married couples.

The credit isn't available for vans, pickup trucks and SUVs with an MSRP of $80,000 or more, or cars that cost more than $55,000. For used EVs, the cut-off is $25,000, and the vehicle must be at least two years old.

Tax breaks for home improvements: A $500 lifetime credit for installing qualified windows, insulation and other energy-saving home improvements has been replaced with a credit of up to $1,200 per year. Taxpayers will be able to claim a $2,000 credit for heat pumps and biomass stoves. You can claim the credits even if you've already claimed the $500 credit, says Mark Luscombe, tax expert with Wolters Kluwer Tax & Accounting. The credit will be available starting in 2023 and doesn't expire until 2032.

The bill also provides a 30% tax credit for installations of residential solar panels, geothermal heat pumps and small wind turbines.