By Amy Whitcomb Price, CPA, MST, Tax & Advisory Director
ASL Real Estate Group
The Inflation Reduction Act (IRA), which includes expanded or extended tax credits, was signed into law on August 16, 2022. The bill has been championed as a “climate change bill”, with many provisions specifically focused on direct consumer incentives to buy energy-efficient appliances, clean vehicles, rooftop solar systems, and invest in home energy efficiency. The bill provides a great opportunity for homeowners to make their homes more eco-friendly while receiving cash incentives from the government to do so. The bill includes:
- $9 billion in consumer home energy rebate programs to electrify home appliances and for energy-efficient retrofits.
- 10 years of consumer tax credits to make homes energy efficient and run on clean energy, incentivizing heat pumps, rooftop solar, and electric HVAC and water heaters.
- Maximum $4,000 consumer tax credit for lower/middle income individuals to buy used clean vehicles.
- Up to $7,500 in tax credits to buy new clean vehicles.
- $1 billion grant program to make affordable housing more energy efficient.
The Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit. This credit focuses on the costs of installing certain energy-efficient insulation, windows, doors, roofing, and similar energy-saving improvements in your home. Starting in 2023, the credit will be equal to 30 percent of the costs of all eligible home improvements made during the year. Additionally:
- The $500 lifetime limit on the total credit amount will be replaced with a $1,200 annual limit. (If you spread out your qualifying home projects, you can claim the maximum credit each year.)
- The annual limits for specific types of qualifying improvements will include:
- $250 for any exterior door ($500 total for all exterior doors) that meet applicable Energy Star requirements;
- $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
- $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers.
For eligible home improvements using products placed in service after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the product and the taxpayer claiming the credit includes the number on his or her return for that tax year. Remember to hold on to the paperwork for any of your “green” home improvement expenditures when it comes to gathering data for your tax return.
Another credit that homeowners will now be able to consider is the current Residential Energy Efficient Property Credit, which has a new name under the Inflation Reduction Act. It is now called the Residential Clean Energy Credit. This credit focuses on installing qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home. The IRA also increased the credit amount, with a phase-out of the applicable percentage. This is a great incentive as the credit has no maximum cap.
Amount of Credit:
- 30 percent for 2022-2032;
- 26 percent for 2033; and
- 22 percent for 2034.
The credit no longer applies to biomass furnaces and water heaters, now covered under the Energy Efficient Home Improvement Credit. However, starting in 2023, this new credit will apply to battery storage technology with a capacity of at least three-kilowatt hours. Until now, the cost of energy storage was only eligible for a tax credit if the batteries were connected to a solar energy source. Under the IRA, battery storage is now eligible regardless of the charging source. Standalone storage provides numerous benefits beyond increasing the value and utilization of intermittent renewable power.
It is important to note that the Inflation Reduction Act significantly changed the rules for the Electric Vehicle (EV) credit. Our recent blog post discusses many of these changes: Inflation Reduction Act Restructures Alternative Fuel Vehicle Credit
If you have an EV there is a credit available for installing EV charging equipment at your residence. The Alternative Fuel Refueling Property Credit expired at the end of 2021, but the IRA gave it life again by extending its application through 2032. For homeowners, the credit is worth 30% of the costs of “qualified alternative fuel vehicle refueling property” installed at their home, up to $1,000. Starting in 2023 the credit applies to the purchase of “bidirectional” charging equipment which can charge the battery of an EV and allow the discharge of electricity from the battery pack out to the electric grid. In case of a blackout, your car’s battery can be used to supply power for your home.
The last item to consider, although not a tax credit is the High-Efficiency Electric Home Rebate Program. The program, which was introduced by the IRA, will provide direct-to-consumer rebates for low- and middle-income families who purchase energy-efficient electric appliances. To qualify for a rebate, your family’s total annual income must be less than 150% of the median income where you live.
Qualifying homeowners can get rebates as high as:
- $840 for a stove, cooktop, range, oven, or heat pump clothes dryer;
- $1,750 for a heat pump water heater; and
- $8,000 for a heat pump for space heating or cooling.
Rebates for non-appliance upgrades will also be available up to the following amounts:
- $1,600 for insulation, air sealing, and ventilation;
- $2,500 for electric wiring; and
- $4,000 for an electric load service center upgrade.
With all of these new incentives available, now is the time to upgrade to a more efficient, green home! Make sure to discuss these upgrades with us or your tax preparer so the proper tax credits are claimed and/or considered.
If you have any questions regarding any of these new tax credits or programs, please reach out to Amy Price, CPA, Tax & Advisory Director, or another member of the ASL Real Estate Group!