Households can save thousands of dollars on air conditioning, heating, appliances, and vehicle upgrades by taking advantage of green energy incentives within the Inflation Reduction Act signed last week by President Joe Biden.
One of the most valuable green energy incentives in the legislation is a 10-year extension of a federal tax credit that reduces the cost of installing a rooftop solar system by 30%.
The act also extends a $7,500 tax credit for electric and other green energy vehicles, but imposes new North American assembly rules that immediately disqualified some previously eligible models.
On top of the tax credit savings, Americans who take advantage of all upgrades incentivized in the act — installing a modern electric heat pump to cool and heat their home, a heat pump for water heating, rooftop solar, and switching to an electric vehicle — will save $1,800 a year on energy bills, according Rewiring America, a nonprofit organization “focused on electrifying everything in our communities.”
Some of the incentives, which consumers will be able to subtract from their 2022 tax bills next spring, took effect on Aug. 16, the day Biden signed the $739 billion act. Some won’t take effect until Jan. 1. Others, including two separate packages of rebates for energy saving upgrades, won’t be available until states set up a process to accept and review applications.
It’s important to know that a tax credit is different from a tax deduction. While a tax deduction is subtracted from taxable income, a tax credit is subtracted from the amount of tax owed and can result in a hefty refund or a smaller tax payment at filing time.
Here’s what we know so far about green energy incentives enacted as part of the Inflation Reduction Act:
Rooftop solar systems
The federal tax credit for purchase and installation of residential solar energy systems has been increased from 26% to 30% and extended through 2032. That means that a homeowner who spends, for example, $20,000 on a solar system at any time over the next 10 years will be able to subtract $6,000 from the taxes they owe for that year.
Before the new law was enacted, the credit was set to be reduced to 23% in 2023 and eliminated the following year.
The 30% tax credit took effect immediately and can be applied retroactively to installations since Jan. 1.
There’s no cap on how much a solar system can cost to be eligible for the 30% credit. If you spend $100,000 on your system, for example, you’ll get a $30,000 credit. It’s a nonrefundable tax credit, though, meaning you won’t get a $25,000 refund if your tax bill is only $5,000. But, continuing our example, you will be able to carry forward that remaining $25,000 credit and spread it over future tax years through 2032.
Backup battery storage
Starting next year, homeowners with existing solar systems will be able to claim a 30% tax credit for adding a backup storage system with a capacity of at least three kilowatt-hours.
Erin Hellkamp, spokeswoman for Solar United Neighbors, a nonprofit that amasses groups of homeowners to negotiate bulk deals with solar installers, said the tax credit can also be claimed by homeowners who install backup battery systems without solar panels. Stand-alone systems can be used to keep power flowing during outages or to cut costs in areas where utilities charge higher rates during peak-usage periods.
Electric and ‘clean’ vehicles
Effective on the day President Biden signed the Inflation Reduction Act, a $7,500 tax credit for purchase of new electric vehicles has been extended through 2032, while buyers of used electric vehicles can get a credit for 30% of the purchase price up to $4,000 starting Jan. 1.
The credit can also be applied to models that meet the government’s definition of “clean” vehicles, including plug-in hybrids with four to seven kilowatt-hours of battery capacity, and hydrogen fuel cell vehicles.
However, some new electric vehicles previously eligible for the credit will no longer be eligible, and consumers will have to do some homework to figure out whether specific vehicles on an eligibility list released Tuesday by the U.S. Department of Energy actually qualify for the credit.
The list shows models that likely meet a new requirement: Only models that undergo final assembly in North America are eligible for the tax credit.
But models on the list aren’t guaranteed to be eligible because some models are assembled in multiple locations.
To ensure eligibility of any specific vehicle on the list, buyers must look up the Vehicle Identification Number (VIN) using the department’s online VIN Decoder at www.nhtsa.gov/vin-decoder, then locate the final assembly location in the “Plant Information” field at the bottom of the page. The final assembly location might also be available on an information label affixed to the vehicle, usually on the inner frame of the driver door.
In addition, some of the most popular electric vehicle models on the list aren’t eligible for the credit for the rest of 2022 because they have already reached a sales cap of 200,000 units. These include 2022 models Chevrolet Bolt EV, Chevrolet Bolt EUV, GMC Hummer Pickup, GMC Hummer SUV, and Teslas models 3, S, X and Y, plus 2023 models Chevy Bolt EV and Cadillac Lyriq.
That leaves 21 eligible vehicles, including plug-in hybrids, as long as they pass the VIN lookup test, including Audi Q5, BMW 3-series Plug-In, BMW X5, Chrysler Pacifica PHEV, Fort F Series, Ford Mustang MACH E, Jeep Grand Cherokee PHEV, Nissan Leaf, Lincoln Aviator PHEV and others.
The manufacturer sales cap will be lifted at the end of the year, reinstating eligibility for the Chevy Bolts, the Teslas, the GMC Hummers and Cadillac Lyriq.
Buyers who signed a written binding contract for a no-longer-eligible vehicle before Aug. 16 but have not yet taken delivery will still be able to claim a $7,500 tax credit for that vehicle.
Beginning in 2024, buyers will be able to transfer their credit to the dealer at the point of purchase and take advantage of the price reduction immediately.
Additional requirements will be phased in beginning next year. One will remove eligibility of cars with a manufacturer’s suggested list price (MDRP) of more than $55,000 and trucks with MSRPs of more than $80,000. Another new rule will restrict who can take the credit to single filers making less than $150,000, single heads of households making less than $225,000 and married couples making less than $300,000.
Energy Efficient Home Improvement Credit
Home improvement credits will change significantly from 2022 to 2023.
For the remainder of 2022, the new law revives a 10% credit for specific energy-efficient improvements, including insulation, roofs, doors, and windows. Homeowners could claim credits totaling no more than $500 over their lifetime for qualifying water heaters, heat pumps, central air conditioning systems, air circulating fans, hot water heaters, and hot water boilers.
Starting in 2023, the credit will be increased to 30% of the cost of qualifying improvements made during the year, and consumers will be able to claim up to $1,200 a year for their improvements, creating an incentive to spread them out over coming years to maximize savings.
Annual tax credit limits will apply for specific improvements, including $150 for a home energy audit; $250 for an exterior door ($500 for all exterior doors); $600 for exterior windows and skylights, central air conditioners; $600 for electric panels; $600 for natural gas, propane or oil water heaters; and $600 for natural gas, propane, or oil furnaces or hot water boilers.
An exception to the $1,200 annual cap will be a $2,000 credit for electric or natural gas heat pumps (heaters and air conditioners) — electric or natural gas heat pump water heaters, and biomass stoves and boilers.
It’s anyone’s guess as to when rebates funded by the Inflation Reduction Act will be made available to consumers. A $4.3 billion program called High Efficiency Electric Home Rebates is being laid on the shoulders of individual states to figure out how to run, with guidance from the federal government. Floridians who waited to apply for federal COVID-19 assistance for renters and homeowners know it can take months for states to figure out how to distribute large tranches of federal money.
It remains to be seen whether homeowners will be able to claim rebates for the same improvements incentivized with federal tax credits or state-funded rebates, Consumer Reports stated in a recent story.
Once up and running, the rebate program will provide up to $14,000 over 10 years for energy-efficiency improvements by households making between 80% and 150% of their area’s median income.
Available rebates will include up to $8,000 for a heat pump (air conditioner and heater); $1,600 for insulation, air sealing and ventilation; $1,750 for a heat pump water heater; and $840 for an electric range or electric heat pump clothes drier. Older homes will need to upgrade their electrical systems to handle the new equipment, so the program will also offer rebates up to $4,000 for upgrades to a home’s electrical panel and service and $2,500 for wiring.
Households making between 80% and 150% of their area’s median income will qualify for a rebate of 50% of their purchase and installation cost, up to the limits listed above. Households making less than 80% of their area’s median income can get up to 100% of their project costs.
States will also administer a separate $4.3 billion rebate program, called Home Owner Managing Energy Savings (HOMES) program, that will provide rebates based on the percentage of total energy savings achieved with retrofits.