Under the recently enacted Inflation Reduction Act (IRA), several new clean energy tax credits and subsidies were funded and/or expanded into the next decade.
The goal of these extended and expanded payments is to “green-ify” homes (zero net carbon emission) and make them more energy efficient, which means fewer greenhouse gases emissions and lower dependence on the dirty energy from fossil fuels.
There is also a strong focus on making these energy efficient tax credits and rebates more accessible to low-income or disadvantaged communities, by introducing qualification income limits.
These clean energy payments will be phased in over the next few months, likely starting 2023, as details are worked through by government agencies and will be available for several years. But here are the key provisions:
Energy Efficient Home Improvement Credit
The IRA expands an existing federal tax break from 2023 – previously known as Non-business Energy Property Credit – to $1200. Unlike the prior $500 limited life time credit, the $1200 maximum credit is applicable on annual basis.
So, if you spread out your qualifying home projects, you can claim the maximum $1,200 credit each year across various energy efficiency upgrades. The annual limits for specific types of qualifying improvements will also be modified – and for the better. Beginning in 2023, they will be:
|Qualifying Item||2023 Annual Tax Credit/Rebate Amount|
|Home Energy Audits||$150|
|Exterior Doors||$250 ($500 max for all exterior doors)|
|Central AC, water heaters, oil furnaces||$600|
|Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers*||$2000*|
For eligible home improvements after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the item, and the person claiming the credit includes the number on his or her tax return.
Residential Clean Energy Credit
Under the IRA guidelines, the federal solar tax credit for residential solar gets boosted from 26% to 30% and is locked in through 2031. The credit is for the installation of home battery systems, which store solar generated energy and provide capacity to return excess power back to the grid.
It also provides an increase 30% rebate (versus 10% in the past) to builders and homeowners for building homes with a clean energy efficiency focus. This includes various energy efficient home installation items like insulation, windows and solar panels
This tax credit drops to 26% in 2033 and 22% in 2034. Before the IRA bill was passed, the credit was at 26% and set to decrease to 22% in 2023 before disappearing altogether.
We will be effectively transferring wealth back from energy producers to energy consumersAri Matusiak, CEO of electrification advocacy nonprofit Rewiring America
High-Efficiency Home Rebate Program
A large rebate funded under the IRA is squarely targeted at lower and middle income homeowners purchasing energy efficient appliances.
Qualification for the rebate has been localized with the household’s needing to earn 150% of the local median income. Rebates are based on type of appliance as shown below:
- $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 and circuit wiring; and
- $4,000 for an electric load service center upgrade.
There will be limits on the amount certain families can get, though. For instance, a rebate can’t exceed 50% of the cost of a qualified electrification project if the family’s annual income is between 80% and 150% of the area median income.
Each qualifying family will also be limited to no more than $14,000 in total rebates (lifetime for the home) under the program.
How can I claim this credit?
While some of the credits and rebates will be applied at the point of sale, building or installation. Many will have to be claimed and/or reported on tax returns.
The rebate program will be administered by the states, and the specifics of applying for and receiving rebates will vary and take some time to be rolled out. I will post updates here as new information is made available.
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There are also several new incentives in the bill for home builders and developers to build energy-efficient homes, or to refurbish older ones in order to make them more energy efficient.