Energy-Related Tax Credits Homeowners Can Use From the 2022 Inflation Reduction Act

Save on energy bills and on taxes by taking advantage of expanded home energy tax credits for 2022.

By , J.D. USC Gould School of Law
Updated 7/21/2023

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.

These energy-related credits are nonrefundable. This means the credits may not exceed the tax you owe for the year. But you can carry forward any unused credits to reduce your taxes in future years. For example, if you qualify for a $7,500 credit, but owe only $5,000 in income tax, you'll use $5,000 of your credit to reduce your taxes for the year to zero. You can use the remaining $2,500 to reduce your taxes the next year.

Energy Efficient Home Improvement Credit

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:

  • exterior windows, skylights, and doors
  • home insulation
  • heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers
  • biomass stoves and boilers
  • electric panel upgrades, and
  • home energy audits.

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:

  • Water heaters, central air conditioners, furnaces: $600 annual cap.
  • Windows and skylights: $600 cap for all exterior windows and skylights.
  • Doors: $250 for any single exterior door and $500 for all exterior doors.
  • Home energy audit: $150 per year.

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:

  • doors: $2,000 x 30% = $600; capped at $500
  • central air conditioner: $5,000; capped at $600
  • windows: $3,000 x 30% = $900; capped at $600
  • insulation:$6,000 x 30% = $1,800

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.

Residential Clean Energy Credit

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:

  • solar water heaters
  • geothermal heat pumps
  • small residential wind turbines
  • residential fuel cells, and
  • storage batteries.

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.

Home EV Charger 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:

  • Low-income census tracts: You must live in a low income census tract that has a poverty rate of at least 20% or a median family income less than 80% of the statewide median.
  • Nonurban areas: Alternatively, you must live in an area designated as nonurban by the U.S. Commerce Department. Less than 20% of the U.S. population lives in such 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.