If you’re planning energy-efficient home improvements or considering the purchase of an electric vehicle in 2023, The Inflation Reduction Act (IRA), signed into law in August, may hold some tax breaks for you.
The climate portion of the 2022 Inflation Reduction Act provides $369 billion in funds to reduce climate change, and kickstart a new era of clean energy in America. That includes extending and enhancing two tax credits that reward energy-efficient upgrades to homes. The bill also introduced new tax breaks for the purchase of electric vehicles and revived one for installing EV charging equipment at home. Low- and moderate-income families may also qualify for tax rebates if they purchase energy-efficient appliances.
Let’s take a closer look at each.
Energy Efficient Home Improvement Credit
One of the tax credits homeowners may be familiar with – the Nonbusiness Energy Property Credit – expired at the end of 2021. However, the IRA bill brings it back with some improvements, and even gives it a new name – the Energy Efficient Home Improvement Credit.
While old rules apply for the 2022 tax year, starting in 2023, the credit will be equal to 30% of the costs for all eligible home improvements made during the year. It will also be expanded to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. Roofing and air circulating fans will no longer qualify for the credit, though. Some of the energy-efficiency standards will be updated as well.
In addition, the previous $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount. 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 also be modified – and for the better. Beginning in 2023, they will be:
- $150 for home energy audits;
- $250 for an exterior door ($500 total for all exterior doors);
- $600 for exterior windows and skylights; central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and
- $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,200 annual limit may be exceeded).
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 their tax return.
This revised credit will be extended through 2032.
Residential Clean Energy Credit
The second credit for homeowners, currently called the Residential Energy Efficient Property Credit, is now the Residential Clean Energy Credit. The credit was previously scheduled to expire in 2024, and is now extended through 2034.
With this revision, the credit amount gets boosted from 26% to 30% of the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home, from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034.
Starting in 2023, the credit no longer applies to biomass furnaces and water heaters, but it will apply to battery storage technology with a capacity of at least three kilowatt hours.
EV Tax Credits Expanded
The tax credit for purchasing an electric vehicle was also revamped by the bill. For EVs placed into service after December 31, 2022, the IRA extends the up to $7,500 EV tax credit for 10 years—until December 2032. The exact amount of the credit will be based on a calculation that considers factors like the vehicle’s sourcing and assembly. Additionally, used EVs (i.e., previously owned clean vehicles that are at least two years old) will now have a separate tax credit of either up to $4,000 or 30% of the price of the vehicle, whichever is less. However, a previously owned EV can’t qualify if it’s purchased for resale.
This EV tax credit applies to any “clean vehicle.” So, a hydrogen fuel cell car, for example, or a plug-in hybrid vehicle with four to seven kilowatt hours of battery capacity, could qualify. Some commercial clean vehicles can also qualify—depending on weight.
Another change is that if you’re buying a clean vehicle, you will have the option, beginning in 2024, to take the EV tax credit as a discount at the time you purchase the vehicle. Essentially, you would be transferring the credit to the dealer, who would be able to lower the price of the vehicle by the amount of the credit. This means that you won’t have to wait until tax time to benefit from the EV tax break.
What about the EV tax credit for the rest of 2022? Essentially, if you purchased an electric vehicle before the Inflation Reduction Act became effective, and that vehicle is otherwise eligible for the old EV tax credit, you can claim that credit.
EV Credit Income Limits and Manufacturing Requirements
You should also know that the Inflation Reduction Act imposes income limits on who can claim the credit.
If you’re single, and your modified adjusted gross income is over $150,000, you won’t qualify for the EV tax credit. The income limit for married couples who are filing jointly is $300,000. And if you file as head of household and make $225,000 or more, you also won’t be able to claim the credit.
Vehicle price and type also matter. Vans, pickup trucks, and SUVs with a manufacturer’s retail suggested price (MSRP) of more than $80,000, won’t qualify for the credit. For clean cars to qualify for the EV tax credit, the MSRP can’t be more than $55,000.
Also, if you buy a used clean vehicle, it will only qualify for the tax credit if it costs $25,000 or less. And in case you were wondering, “used” or “previously owned” for purposes of the EV tax credit, mean that the car is at least two years old.
For manufacturers, there’s a mix of good and bad news. Before the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles couldn’t qualify for the EV tax credit because it phased out once the manufacturer reached the 200,000-car cap. The IRA removed that cap, which means that some cars made by manufacturers who exceeded the 200,000 limit will now be eligible to claim the credit.
On the flip side, the credit is more restrictive in that the final assembly must be in the U.S. and most of the battery must be U.S. made. (Note: only three foreign auto dealers qualify currently; none of the Asian companies)
Alternative Fuel Refueling Property Credit
A related tax credit that may interest certain homeowners was also impacted by the legislation. The Alternative Fuel Refueling Property Credit expired at the end of 2021, but the bill 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 in the home, up to $1,000.
High-Efficiency Electric Home Rebates
Although not a tax credit, the High-Efficiency Electric Home Rebate Program provides rebates to 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.
- There are 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 under the program.
- The $4.5 billion to be allocated for rebates will be distributed to families through state and tribal governments that establish their own qualifying programs. The funds will be available through September 30, 2031.
It’s important to note that while these rebates are funded by the U.S. federal program, all will run through local state programs.
If you’d like help navigating all the incentives and limits, please reach out to your tax professional or financial planner. We’re happy to translate the numbers for your individual situation and help you make more informed decisions.