In August, President Joe Biden signed the Inflation Reduction Act into law — marking the largest federal investment in climate and energy law in history. In addition to creating jobs in clean energy and manufacturing sectors, the act adds tax credits and rebates for homeowners seeking more energy efficiency and lower utility bills.
Historically, only taxpaying entities were able to take advantage of renewable energy tax incentives; with the new legislation, homeowners and tax-exempt entities such as local governments can take advantage as well.
From buying electric vehicles to installing solar panels and other home-efficiency upgrades, the IRA can cover some of the costs and help you save money in the long run.
Beginning next year, tax credits and rebates covering 10% of the costs of installing insulation, windows, doors, roofing, and other energy-saving improvements will be bumped up to 30%. The annual tax credit limit of $500 will increase to $2,000 on eligible home improvements, and will include upgrades such as stoves and boilers, water heaters, electric panels, and home energy audits.
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Frequently Asked Questions
- What is a tax credit and how is it different from a rebate?
Often referred to as an investment tax credit, or ITC, a tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000.
A rebate is a form of buying a discounted item and getting money back in the way of reduction, return, or refunds. Beginning in 2023, state programs will offer low- and moderate-income households rebates on buying heat pumps — cutting purchasing and installation costs up to $8,000. If home electrical upgrades are needed to integrate the system, rebates of up to $4,000 will also be available.
- Can I get a tax credit if I want to install solar panels on my home?
Yes. Right now, households can get a tax credit covering up to 30% of the costs of installing rooftop solar. Beginning next year, the credit will also apply to solar systems that are paired with battery storage, as well as stand-alone battery storage installed without solar panels. The installation of the system must be completed during the tax year for the credit to be applied.
- Are tax credits available for buying an electric vehicle?
Yes. income-qualified households are eligible now for a tax credit of up to $7,500 when buying a new electric vehicle. The vehicle must be assembled in North America, and it must be bought and delivered on or before Dec. 31. Beginning next year, the requirements will expand to include pickup trucks, vans, and SUVs priced at $80,000 or less and other used vehicles — including sedans — valued at $55,000 or less.
For previously owned electric vehicles, income-qualified households will have access to a tax credit of up to $4,000. The vehicle must be at least two years old and cost $25,000 or less.
- I need to replace my furnace or aid conditioner. Do I qualify?
Yes. Eligible households can get a $300 tax credit when buying a new heat pump, but the total of current and previously used tax credits cannot exceed $500. These include modifications made for energy-efficiency improvements and high-efficiency furnace and air conditioning units.
But there's good news. Beginning next year, households can claim up to 30% of the cost of buying and installing a heat pump, and up to $2,000 (including technical support) for any electric system upgrades needed to winterize and make the home "heat-pump-ready."