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.
Timing 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.)
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.
- 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.
- 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.
- 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.
Author: Liga Tyack
Liga is the Tax Manager of Callahan Financial Planning serving clients in San Rafael, San Francisco, and and Mill Valley in Northern California, in the Denver metro area in Colorado, and Omaha and Lincoln in Nebraska.