New law saves more on green updates
If you’re planning a few home improvements that will boost the energy efficiency of your house, you may save some money on your projects now that the Inflation Reduction Act has been signed into law. One of the act’s main goals is to address climate change and slow down global warming.
The legislation extends and enhances two tax credits that reward “green” upgrades to your home. First, homeowners can cut their tax bill if they install new energy-efficient windows, doors, water heaters, furnaces, air conditioners and the like.
There are also new tax breaks for the purchase of electric vehicles and a revived tax break for installing EV recharging equipment at home.
Low- and moderate-income families may also qualify for rebates if they purchase energy-efficient appliances. With these changes, it’s a little easier going green for American homeowners.
For home energy improvements
One of the tax credits that homeowners may be familiar with — the Nonbusiness Energy Property Credit — actually expired at the end of 2021. However, the Inflation Reduction Act brings it back to life, improves it substantially, and even gives it a new name: the Energy Efficient Home Improvement Credit.
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.
In addition, the $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount (the lifetime limit on windows will go away, too). So, 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 his or her tax return.
Finally, the revised credit will be extended through 2032.
For electricity and heat
The second credit homeowners are eying is the current Residential Energy Efficient Property Credit, which also gets a new name under the Inflation Reduction Act. It’s now called the Residential Clean Energy Credit. The credit, which was previously scheduled to expire in 2024, is extended through 2034 as well.
In addition to a name change and extension, the Inflation Reduction Act also boosts the credit amount. Previously, the credit was worth 26% 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. (The credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity.)
Under the Inflation Reduction Act, the credit amount jumps to 30% from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.
The scope of the credit is adjusted under the Inflation Reduction Act, too. Starting in 2023, it 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.
Electric vehicle credits
The tax credit for purchasing an electric vehicle was also revamped by the Inflation Reduction Act. However, 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 Inflation Reduction Act 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.
For most homeowners, the “qualified alternative fuel vehicle refueling property” they might purchase is equipment used to recharge an electric vehicle.
The Inflation Reduction Act also clarifies that the credit applies to the purchase of “bidirectional” charging equipment, which can charge the battery of an electric vehicle and allow you to discharge electricity from the battery back out to the electric grid.
Rebates for high-efficiency items
Although not a tax credit, the High-Efficiency Electric Home Rebate Program will also help American families go green. The program, which was added by the Inflation Reduction Act, will provide 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.
© 2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.