The Inflation Reduction Act made it possible for millions of Americans to save money on their taxes and utility bills through conserving energy.
• The US tax code provides several tax credits meant to lower the cost of going green and upgrading your home or property to be more energy-efficient.
• Recent changes coming from The Inflation Reduction Act significantly extended and/or expanded several tax benefits aimed at conserving and self-generating energy, making the products more easily available to taxpayers.
• Combined, these tax credits can amount to thousands of dollars per year and tens of thousands of dollars over the lifetime of the tax benefits.
What are energy tax credits?
Energy tax credits are credits available to individual and business taxpayers who install certain energy-efficient products in their homes and businesses, take specific qualifying actions to conserve energy, or otherwise invest in energy equipment. These investments can include solar panels, geothermal heating systems, energy-efficient windows, electric vehicle charging infrastructure, insulation, and more.
These credits are designed to help offset the cost of purchasing, installing and operating these energy-efficient products. Taxpayers who qualify may be able to receive up to 30% of the total cost of the project in the form of a federal tax credit. Some states also offer additional tax incentives that lower your costs further.
The four main energy tax credits include:
- Energy Efficient Home Improvement Credit. Renamed, revamped, and extended after passage of the Inflation Reduction Act of 2022, this credit is in effect from January 1, 2023, through December 31, 2032 and is worth up to $1,200 per year for qualifying property placed in service on or after January 1, 2023. Certain installations may also qualify for an additional $2,000 per year.
- Residential Clean Energy Credit. Also renamed, revamped and extended with the Inflation Reduction Act, this credit is worth up to 30% of qualifying expenses for residential clean energy property. In addition to being extended through 2034, the new credit has added battery storage technology as an eligible expenditure.
- Alternative Fuel Refueling Property Credit. This credit was also extended and expanded by the Inflation Reduction Act of 2022 and now applies to new EV charging equipment, including new items like bidirectional chargers. The tax credit is worth up to 30% of the cost of hardware and installation up to $1,000.
- Clean Vehicle Credit. This is another nonrefundable credit that’s been expanded to cover plug-in electric and other “clean” vehicles, and is worth up to $7,500. The Clean Vehicle credit has new rules for claiming the credit based on assembly location, income thresholds, and expanded eligibility for the vehicles covered by the credit.
By taking advantage of available energy tax credits, consumers can save money on their energy bills while also reducing their carbon footprint.
How do these energy tax credits work?
Energy tax credits work by lowering the cost of qualified investments you make to save energy in your home or automobile. They are applied to your income tax liability in the year claimed, offsetting the cost of these energy-saving improvements. They lower the cost on a dollar-by-dollar basis, providing greater effective savings than a tax deduction worth an equivalent amount.
For example, a $1,000 tax credit is worth more than a $1,000 tax deduction because the tax credit lowers your tax liability by $1,000, whereas the tax deduction lowers your taxable income by $1,000. If you’re in the 24% tax bracket, you’d only save $240 under this tax deduction as compared to potentially $1,000 of the tax credit.
Energy efficient home improvements eligible for tax credits
The Inflation Reduction Act took the expiring Nonbusiness Energy Property credit that is no longer available, and breathed new life into it, extending the credit through December 31, 2032, and expanding it to be worth $1,200 per year for qualifying property placed in service on or after January 1, 2023. The newly improved credit also got a new name: the Energy Efficient Home Improvement Credit.
Adding further value to the credit, it no longer carries a lifetime limit and instead uses an annual limit to provide taxpayers with money back on qualifying investments. That means over the 10-year life of the credit, you can receive up to $12,000 back on your taxes plus the potential to receive an additional $2,000 per year for making qualified investments in heat pumps and biomass stoves and boilers.
The specific categories of home improvement expenses that qualify for the new credit and their associated allowable amounts per year will be the following:
- Home energy audits: $150
- Exterior doors: $250 per door (up to $500 per year)
- Exterior windows and skylights, central A/C units, electric panels and related equipment, natural gas, propane and oil water heaters, furnaces or hot water boilers: $600
- Heat pumps and biomass stoves and boilers: $2,000 (this one category qualifies to go above the $1,200 annual limit)
Generating and storing renewable electricity can save you more
The Inflation Reduction Act also pumped up another energy tax credit that can help taxpayers conserve energy: the Residential Clean Energy Credit. Formerly called the federal investment tax credit, the credit applied to people interested in installing qualifying solar and storage equipment in their homes or businesses. The credit rate varied over the years, often seesawing with legislative extensions and adjustments as the credit neared expiration and the solar industry sought financial certainty. Currently, the new credit has been extended through 2034 and will be worth 30% of your qualified project costs from 2022 through 2032, when it falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034. There's no limit on the amount of credit for qualified purchases that you can claim each year.
An additional change that came from The Inflation Reduction Act is the scope of the credit to no longer include biomass stoves beginning in 2023 and to include battery storage technology with a storage capacity of at least three kilowatt-hours. Previously, standalone energy storage projects failed to qualify for the investment tax credit and could only claim the credit when they were installed in connection with a new solar power project. And even in those circumstances, you could only claim the energy storage project costs toward the tax credit only to the extent the energy storage project was charged at least 80% by the solar facility. The new law generally allows energy storage projects to qualify if they have a capacity of at least 3 kilowatt-hours (kWh).
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