Among the many provisions of the Inflation Reduction Act (IRA) that was passed in mid-2022 was one extending and expanding three existing tax credits that encourage homeowners to make their homes more energy efficient and to use an electric vehicle.
For taxpayers, nothing is better than a tax credit, because it is a dollar-for-dollar reduction in the taxes you must pay. Contrast this with a tax deduction, which only reduces your taxable income, such that the benefit to you is only a percentage difference. In other words, a $1,000 credit saves you $1,000 in taxes.
Starting in 2023, the Energy Efficient Home Improvement Credit will be equal to 30% of what homeowners pay for various types of home energy efficiency improvements, including:
These improvements must meet Energy Star requirements, and insulation must meet criteria established by the International Energy Conservation Code. Starting in 2025, manufacturers will have to create product identification numbers for their products that satisfy the energy efficiency requirements. Then taxpayers will have to include those numbers on their tax returns.
The old credit contained a lifetime cap. Taxpayers would hit the limit at a mere $500. Under the IRA legislation, lifetime caps are eliminated. Instead, there is a $1,200 overall annual cap on the new credit along with annual caps for the following types of improvements:
This means you can perform home energy efficiency projects over several years and collect a credit up to $1,200 each year. Heat pumps, biomass stoves, and boilers have a $2,000 annual cap, which is not included in the $1,200 annual limit.
Example: In 2023, Henry Homeowner spends $2,000 to install two exterior doors, $5,000 to install central air conditioning, $3,000 on five windows, and $4,000 on home insulation. His credit is:
Total credits before $1,200 annual cap: $3,500
Total allowable credit: $1,200
If Henry delays installing the new insulation until 2024, he can get a $1,200 tax credit for that year as well.
The Residential Clean Energy Credit applies primarily to the installation of home solar panels, but it can also be claimed for the cost of purchasing and installing:
The Inflation Reduction Act increases the credit from 26% to 30% for 2022 through 2032. The credit then declines to 26% for 2033 and 22% for 2034.
There is no annual or lifetime cap on this credit and you can use it for your main home or second home. If the credit exceeds you tax liability for the year, any unused amount can be carried forward to reduce your tax liability in future years.
Example: Bill installs solar panels in his home. His residential clean energy credit is equal to 30% of the total cost, which is $21,000. Bill gets a $6,300 credit. Bill only owes $5,000 in income tax for the year. He uses $5,000 of the credit to reduce his tax liability for the year to nothing and then carries forward the remaining $1,300 to use the following year.
Many states also offer residential solar tax credits. The federal credit isn't reduced if you get a state credit, but some states do reduce their credits if you get a federal credit.
The Inflation Reduction Act also extends though 2032 the tax credit for installing a home EV charger. The amount of credit remains at 30% of the cost of purchasing and installing a home charger, capped at $1,000 per year.
However, the credit now applies per charger—for example, if you purchase two home chargers you can obtain a $2,000 credit. The credit is also extended to include bidirectional chargers that can be used to power a home and feed energy back into the electricity grid—these are just becoming available and cost more than regular EV chargers. The credit also now applies to home chargers for two and three-wheeled vehicles.
Starting in 2023, the credit will be available only to homeowners who live in one of the following low-income or nonurban areas:
Example: Mary lives on a farm in rural Iowa and spends $2,000 to install a home EV charger unit in her home garage. She may claim a tax credit equal to 30% of the cost, or $600.