The Inflation Reduction Act Will Save Families Thousands of Dollars

This article contains a correction.

The Inflation Reduction Act, passed by Congress and signed by President Joe Biden last month, makes historic investments to address climate change and contains the most sweeping health care reforms in a decade. The policies in the law are monumental on a national scale, reducing the deficit by $300 billion and standing up programs to spur the transition to clean energy and lower prescription drug prices. The act also provides near-immediate, tangible benefits for American families by lowering costs for home energy, new vehicles, health coverage, and prescription drugs.

The Inflation Reduction Act provides numerous opportunities for households to reduce their costs of living. This article provides four examples of how savings across the health care and climate-related provisions of the law could save a family thousands of dollars in a single year.

A family of four can save $23,000

First, imagine a family in Phoenix consisting of two parents and two kids. Their household income is $125,000, and they purchase health insurance on their own through the Affordable Care Act (ACA) marketplaces. They are homeowners, and in 2023 they will purchase a new electric vehicle (EV) and install rooftop solar with a backup battery.

The Inflation Reduction Act will reduce the cost of health coverage for this family. Like other families with incomes above 400 percent of the federal poverty level (FPL), the Phoenix family was previously ineligible for the ACA’s financial help toward health insurance marketplace premiums. The American Rescue Plan, which Congress passed in March 2021, increased the generosity of ACA premium tax credits and expanded eligibility above 400 percent of the FPL for 2021 and 2022. The Inflation Reduction Act extends those expanded subsidies through 2025. For the Phoenix family in 2022, the enhanced subsidies reduce the net cost of the marketplace benchmark silver plan premium by $2,288 annually—savings of 18 percent on a premium that would have otherwise been $12,913.

Under the Inflation Reduction Act, the Phoenix family is eligible to receive $7,500 at the point of sale off the cost of their new EV, provided they choose a model that meets the requirements for being made in North America. Once they have switched from a gasoline-powered car to an EV, the family will save up to $2,600 annually on their fuel costs. By installing rooftop solar and a backup battery to store the energy generated from the solar panels, the family will save 30 percent on project and installation costs, an average savings of $10,500. Together, these shifts toward cleaner energy could save the family $20,600.

In total, through the ACA premium tax credits and by taking advantage of the clean energy credits in the Inflation Reduction Act, the family can expect to save roughly $23,000 in 2023.

A single parent can save $6,700

In Atlanta, a 55-year-old single parent with an 18-year-old child could save a total of about $6,700 across health care and energy costs because of the Inflation Reduction Act. With an income of $75,000, the enhanced marketplace subsidies saved them an additional $5,592 toward health care coverage this year.

The appliances—water heater, stove, dryer, and more—in the family’s rented apartment can be upgraded to energy-efficient appliances that will reduce energy bills and avoid indoor air pollution. Thanks to rebates in the Inflation Reduction Act, their landlord can have the full cost of the upgrade covered up to $14,000 given the income levels of the renting family. Across all households, the Inflation Reduction Act was projected to cut average annual energy costs by up to $1,146 according to the Rhodium Group. The forward-looking households who choose to switch to lower-cost electricity and higher-efficiency appliances such as heat pumps will save even more than the average.

A young adult can save $7,700

Single individuals can also expect to see their costs go down as a result of the Inflation Reduction Act. A young adult in Milwaukee with an annual income of $40,000 can save roughly $7,700. They can save an additional $1,114 on their marketplace premium this year due to the enhanced financial help that the new law has extended.

This young adult is eligible to receive $4,000 at the point of sale for purchasing a used electric vehicle, a brand-new tax credit created by the Inflation Reduction Act to increase the accessibility and affordability of EVs. By making the switch from a gas-powered vehicle to an EV, they will save up to $2,600 in annual fuel costs, according to Consumer Reports.

An elderly couple can save $17,000

For seniors, the Inflation Reduction Act offers relief from high prescription drug costs. For example, take an elderly, middle-class couple living in Pittsburgh who—like 1.4 million other Medicare beneficiaries nationwide, including 73,000 Pennsylvanians—spend more than $2,000 out of pocket for prescription drugs in a given year. In addition, one member of the couple is diabetic and insulin-dependent.

The Inflation Reduction Act makes significant changes to prescription drug pricing by allowing Medicare to negotiate lower prices and preventing drug companies from hiking prices in excess of inflation. The law’s drug price reforms are projected to generate $288 billion in federal savings over the next decade, and Medicare seniors will experience improved affordability because the act creates a new $2,000 maximum on annual out-of-pocket costs for prescription drugs and caps insulin cost sharing at $35 per month.

Assuming the Pennsylvania couple’s out-of-pocket costs are equal to the average among beneficiaries whose drug costs exceed these new limits, they could each save $1,215 when the cap takes effect in 2025—$2,430 total—because of the annual out-of-pocket maximum, and they would save an additional $575 on insulin every year beginning in 2023.

This couple is eligible to receive up to $14,000 to cover the full cost of energy efficiency upgrades to their home appliances, such as a heat pump water heater, a heat pump for space heating or cooling, or an electric stove. The upgrades will come at no cost to the couple—and will help them save on their energy bills every year. Switching to energy-efficient appliances will also benefit the couple’s health by significantly reducing indoor air pollution from fossil fuel-based appliances.

In total for this scenario, the couple could save $17,000 on prescription drugs, new appliances, and energy bills in a single year.

Conclusion

The four households described in these scenarios will save thousands of dollars on basic purchases under the Inflation Reduction Act, and yet none will see their taxes rise. Even families who do not make the switch to electricity will still benefit from the law’s investments, which will reduce electricity rates, natural gas prices, and gasoline prices. Moreover, the new law’s wide-ranging benefits and deficit reduction are funded by ensuring that the wealthy pay what they owe and by cracking down on tax avoidance by large corporations, meaning that no family making less than $400,000 per year will experience a tax increase.

The Inflation Reduction Act delivers better affordability on life-saving medications, health insurance premiums, and energy bills. It will produce large savings for families who upgrade to cleaner energy, electric vehicles, and more efficient homes, which in turn will generate savings for years to come.

Methodology

The Affordable Care Act marketplace savings described in this column represent the reduction in the net premium for benchmark silver plan coverage attributable to premium tax credit enhancement introduced in the American Rescue Plan. The authors used the Kaiser Family Foundation’s calculator tools to compute each household’s net premium with and without the enhanced subsidies, then reported the difference. Amounts are based on premiums for plan year 2022, the most recent year with available data. Because marketplace premiums vary with age, family composition, family income, and location, additional examples of savings for selected cities are shown below in Table 1.

Table 1

The prescription drug savings numbers for seniors come from analyses by the Kaiser Family Foundation, which estimated savings generated by the new $2,000 annual limit among Medicare beneficiaries who had more than $2,000 in out-of-pocket drug costs and were not eligible for the Part D Low Income Subsidy (LIS) based on 2020 data. Similarly, the estimated savings from the $35 cap on beneficiaries’ monthly insulin costs is an average among beneficiaries without LIS based on 2020 data. Table 2 provides data points on out-of-pocket drug savings for select states.

Table 2*

The energy savings represent combinations of the various tax credits and rebates passed in the Inflation Reduction Act. Eligibility for some of these programs vary based on a household’s income level relative to the area median income (AMI). The authors used the U.S. Department of Housing and Urban Development’s fiscal year 2022 median family income estimates to calculate local income eligibility requirements for the necessary tax credits and rebates. The relevant provisions used to calculate family savings are as follows:

• Section 13401: Clean vehicle credit. This provision provides a $7,500 tax credit toward the purchase of a new EV so long as the vehicle meets domestic content requirements. The income limit is $300,000 for married couples filing jointly, $225,000 for heads of household, and $150,000 for all other taxpayers. The vehicle’s retail price as suggested by the manufacturer must be less than $55,000 for cars or $80,000 for SUVs and pickup trucks.
• Section 13402: Credit for previously owned clean vehicles. This provision provides a tax credit for the purchase of a used EV that is the lesser of $4,000 or 30 percent of the sale price of the vehicle. The income limit is $150,000 for married couples filing jointly, $112,500 for heads of household, and $75,000 for all other taxpayers.
• Section 13302: Residential clean energy credit. This provision extends and modifies the 25D tax credit, which provides a credit equal to 30 percent of the cost of the energy project. Eligible projects include solar installations, geothermal heating installations, and battery storage installations. The savings amounts used in the article above were calculated from average project costs according to Rewiring America. Rewiring America states that average project costs for solar, geothermal, and battery storage are $19,000, $24,000, and $16,000, respectively.
• Section 50122: High-efficiency electric home rebate program. This provision gives funding to state energy offices to provide rebates to eligible households for qualified electrification projects. Qualified projects include heat pump water heaters, heat pumps for heating and cooling, electric stoves, insulation, and more. Low-income households that make less than 80 percent of the AMI can have 100 percent of the cost of these projects covered at a maximum rebate of $14,000. Households making between 80 percent and 150 percent of the AMI can have 50 percent of project costs covered. In the case of renters, landlords receive the rebate to make electrification upgrades. For example, landlords who manage multifamily buildings of which at least 50 percent of residents make less than 80 percent of the AMI receive the full rebate amount.
• Savings for EV owners. The authors use analysis from Consumer Reports from March 2022 to assume the amount of savings achieved by switching from a gas-powered car to an EV. Consumer Reports found that EV owners can save on average between $1,800 and $2,600 in operating and maintenance costs each year. Their calculations are based on a national gas price of $4.31 per gallon and electricity price of $0.14 per kilowatt-hour.
• Energy bill savings. The authors use analysis from the Rhodium Group to calculate energy bill savings. The Rhodium Group found that by reducing overall demand for fossil fuels, the Inflation Reduction Act will drive down energy costs by as much as $1,146 in 2030 for all households relative to current energy costs.

* Correction, September 14, 2022: This article has been updated to accurately reflect that projected savings for Medicare Part D beneficiaries in Table 2 constitute average annual savings.