The Inflation Reduction Act of 2022 – Long-term Tax Savings and Value-added “Green” Benefits for Homeowners

 

The Inflation Reduction Act was passed by both houses of Congress and signed into law in August 2022. Below is a summary of the updates and accretive investment impacts of The Inflation Reduction Act (“The IRA”) for US homeowners in tax years 2022 and 2023 through 2032.

The IRA provides material tax benefits and tax planning opportunities for individual households over the next 10 years by creating an investment framework to guide households’ decisions about when to undertake valuable, energy-efficient improvements to their homes. This has created an opportunity to optimize annual tax savings, reduce long-term energy bills, and also create a “cleaner” and “greener” home. Altogether, these stepwise, “green” investments can be expected to accentuate a home’s long-term asset value by reducing total costs of ownership (i.e., substantially lowering energy bills) while at the same time contributing to growing the “green footprint” of a single home or even of a community.

aerial view of modern housesTiming of Tax Credits

First, irrespective of any new impacts from The IRA, it is important to note that any energy-efficient improvements made to your home in any one year must be claimed on your individual tax return in the same year when improvements are made. There is, unfortunately, no “carry-over” of energy efficiency tax credits or rebates permitted from one year to the next.

For example, a homeowner would not be able to install a heat pump, solar panels, or an induction stove in 2022 and claim the tax credit in any other tax year except for the year when they were installed. However, a homeowner could install a heat pump in 2023, a heat pump hot water heater in 2024, an induction stove in 2025 and solar panels in 2026 and claim the tax credits and rebates available from each of these investments in each of those tax years, subject to higher annual investment limitation thresholds as outlined below.

Additionally, the Energy Credits outlined in The IRA Provisions A and B below must be claimed on the household’s federal tax return itself at the time of filing as dollar-for-dollar “tax credits” against a tax liability due in that year to reduce that tax liability. (There is no “refund” of the energy tax credit if the household has no federal tax liability against which to claim the credit.)

New Provisions

Second, The IRA will generally provide for greater tax credit benefits for homeowners in 2023 through 2032, than in 2022. However, The IRA has fortunately also extended energy-efficient tax credits set to expire in 2021 out to include 2022. So, energy-efficient tax credits expected to sunset in 2021 will still remain available in 2022.

The IRA Energy Efficient Home Improvement Umbrella essentially includes three provisions. A short summary of each is outlined below.

  1. The Energy Efficient Home Improvement Credit (effective January 1, 2023)
    • This extends (and officially renames) the former Nonbusiness Energy Property credit.
    • In 2022, this tax credit is worth 10% of the cost of installing energy-saving improvements, with a lifetime limitation of $500.
    • However, in 2023, a $1,200 annual tax credit limit replaces the $500 lifetime tax credit. The 2023 tax credit will be equal to 30% of the costs of all eligible home improvements made in each year and also includes coverage of electric panels, home energy audits, and other items such as appliances.
    • Beginning in 2023, The IRA includes annual tax credit limits of up to $2,000 for heat pump and heat pump hot water heaters for homeowners who would otherwise not qualify because of higher household income. (See Section C below) As such, the $2,000 heat pump tax credit is an exception to the $1,200 annual limit.
  2. The Residential Clean Energy Credit
    • This tax credit was slated to end in 2021 but was revived in 2022 due to The IRA and extended to 2032. Similar to the Energy Efficient Home Improvement tax credit, this credit is claimed on the tax return itself.
    • The tax credit amount for installing “green” household energy based on solar, wind, or geothermal sources has been raised from 26% in 2022 to 30% annually from 2023 to 2032, including equipment and installation costs.
    • The installed equipment must be Energy Star certified.
  3. The High-Efficiency Electric Home Rebate Program
    • This Program will include an upfront rebate of $8,000 to install heat pumps that can both heat and cool homes and a rebate of up to $1,750 for heat pump water heaters.
    • While homeowners will be able to collect a maximum of $14,000 in total rebates, household income cannot exceed 150% of the area median income (equivalent to $225,000 in high-income areas like Marin County and San Francisco in 2022) to qualify for this Rebate Program.
    • Homeowners living on lower fixed incomes may be especially well-suited to consider the Electric Home Rebate program as they could qualify for maximum rebates. This is where smart tax planning can play a key role.
    • The rebate will be a direct discount on the purchase price of the energy-efficient equipment rather than a credit on the tax return. The intent is to provide rebates on qualified purchases (that are “Energy Star certified”) at the point of sale.
    • Importantly, however, given Federal and State rules need to be updated to administer the Electric Home Rebate Program, this third prong of The IRA is not expected to be up and running until later in 2023, and the details are expected to differ by state.

If you have any questions or would like more information about how you may benefit from these Inflation Reduction Act Programs from a tax-planning perspective, please reach out or give us a call at Callahan Financial Planning at 800-991-5195.

Callahan Financial Planning Opens Denver Metro Financial Advisory Office in Centennial, CO

Denver – Jun 12, 2020 – Callahan Financial Planning, a fiduciary financial planning and investment advisory company, has announced the opening of an office with financial advisors in Centennial, CO. The office is located at 6500 S Quebec St, Centennial, CO 80111 in the Denver Tech Center.

Clients will be served by a team of 4 Certified Financial Planner™ (CFP®) practitioners, a Chartered Financial Analyst (CFA®) charterholder, an IRS Enrolled Agent, and supporting staff. Read the rest of this entry »

Same-Sex Couples May Now File Joint Income Tax Returns

The U.S. Department of Treasury and Internal Revenue Service have just established that several key income tax benefits previously only available to opposite-sex marriages are now available to those in a same-sex marriages as well.

Under the announcement (U.S. Treasury) and the rule (IRS), benefits now available include the ability to file a joint income tax return (which may cut your tax cost), but also increase the tax-free part of a couple’s estate for transfer to heirs (double an individual’s lifetime limit). Additionally, all the same income tax benefits that may come from filing a household income tax return are available, including deductions, exemptions and credits. Read the rest of this entry »

The Benefits Of Budgeting

When it comes to personal finance there is one word that makes almost everyone cringe… Budgeting. Most people feel that maintaining a budget means that it will be the end of all of the “fun”. In reality, establishing and following a sound budget does just the opposite. It not only allows you to control your spending, but also is the foundation to achieve the financial goals you truly desire.

Here at Callahan Financial Planning we simply define a budget as providing for your needs within scarcity, which is the limited amount of money available to you. This means living within the amount of money you earn while taking care of your needs. The goal of having a budget isn’t to restrict your spending, but to cover all your necessities and focus any remaining money on what is most important to you. Budgeting forces you to take an in depth look at where your money is currently going and decide if that’s where it should go in order to accomplish your true goals. Read the rest of this entry »

What Should I Do with My 401(k) After Changing Jobs?

This is the first in a four part series designed to help you determine the best way to proceed with your previous employer’s company retirement plans, including 401(k)s, 403(b)s and more. Part 1| 2 | 3 | 4

What do you think about when you get a new job?

If you’re like most, you’re focused on what the new employer expects from you, learning your position, new processes and dozens of other details that come along with a new position.

This can be a very stressful time for any individual and although it’s the last thing anyone wants to think about, it’s important to remember your company retirement plan(s).  These include 401(k)s, 403(b)s, SIMPLE IRAs, Thrift Savings Plans and more.  If you’re not consciously thinking about your 401(k) or other employer sponsored plan it can be easy to think “I’ll get around to it later” and eventually forget about it all together. Read the rest of this entry »

Do I Need Financial Planning?

Have you been thinking about creating a financial plan for yourself, but just don’t know if you actually need to take the time to do it? If you’re teetering on the idea, ask yourself the following questions:blank

  • Are you unclear about how your current investments are performing?
  • Do you and your spouse differ over how to handle your money?
  • Are you confused about the vast array of investment options?
  • Do you feel you pay too much in taxes?
  • Are you uncertain if you have the right kinds and amounts of insurance?
  • Have you delayed creating an estate plan?
  • Are you worried about not having enough money to retire?

If you answered ‘yes’ to any of the following questions, there’s a good chance you should consider financial planning. Read the rest of this entry »