In an era of growing environmental consciousness, the Inflation Reduction Act of 2022 offers a suite of tax credits to make energy efficiency and renewable energy more accessible and financially attractive. This landmark legislation includes the Residential Clean Energy Credit, Energy Efficient Home Improvement Credit, Clean Vehicle Credit, and Alternative Fuel Refueling Property Credit, among others. These incentives support a range of green initiatives, from home upgrades to clean vehicle adoption, helping individuals and businesses reduce their carbon footprint and save on energy costs.
Residential Clean Energy Credit
Previously called the Residential Energy Efficient Property Credit, the Residential Clean Energy Credit applies to certain property types. The tax credit equals the sum of 30% (beginning in tax year 2022) of the following expenditures made by the taxpayer during the year:
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- Qualified solar electric
- Qualified solar water heating
- Qualified fuel cell
- Qualified small wind energy
- Qualified geothermal heat pump
- Qualified battery storage technology
The applicable percentage is decreased to 26% starting in 2033, to 22% starting in 2033 and phases out completely before January 1, 2035.
Various certification requirements apply. The credit is nonrefundable, but if the credit exceeds the taxpayer’s liability for the year, the credit is carried over to the next year.
Expenditures include the cost of labor for onsite preparation, assembly and original installation of the property.
Energy Efficient Home Improvement Credit
Previously called nonbusiness energy property credit, the energy efficient home improvement credit applies to energy efficient improvements made to any residence of the taxpayer.
The tax credit does not apply to new construction and does not apply to business property (such as a rental property).
Qualified energy efficiency improvements include:
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- Energy efficient insulation
- Exterior windows
- Skylights
- Exterior doors that meet energy standard requirements
Qualified residential energy property include the following that meet or exceed certain high efficiency standards:
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- An electric or nature gas heat pump water heater
- An electric or natural gas heat pump
- A central air conditioner
- A natural gas, propane, or oil water heater
- A natural gas, propane or oil furnace or hot water boiler
- A biomass stove or boiler which uses the burning of biomass fuel to heat a dwelling unit or to heat water for a dwelling unit
- An oil furnace or hot water boiler
- Improvements to or replacement of a panel-board, sub-panelboard, branch circuits, or feeders with a load capacity of not less than 200 amps which is installed in conjunction with an energy efficient improvement
The tax credit equals the following:
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- 30% of the cost of qualified energy efficiency improvements paid or incurred by the taxpayer during the year
The following limitations apply for certain improvements:
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- 30% of the cost of exterior windows, including skylights up to a credit limit of $600,
- 30% of the cost of exterior doors, insulation and/or systems which reduce heat gain or loss up to a limit of $250 per year and $500 in the aggregate,
- 30% of the cost of heat pumps, and heat pump water heaters, biomass stoves and boilers up to $2,000 per year.
The improvements must meet certain applicable energy-efficient requirements, as prescribed by regulations and guidance issued by the IRS.
In addition to qualifying property summarized above, a home energy audit is also eligible for a tax credit under this section. The term “home energy audit” means an inspection and written report with respect to a dwelling unit owned or used by the taxpayer as the taxpayer’s principal residence that identifies the most significant and cost-effective energy efficient improvements, including an estimate of the energy and cost savings with respect to each improvement. The home energy auditor must meet certain certification requirements as established by the IRS.
The home energy tax credit equals the following:
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- 30% of the amount paid for a home energy audit during the year, up to $150 per tax year
To ensure you’re taking full advantage of the energy tax credits available to you, it’s wise to seek professional assistance. Connecting with an experienced tax advisor can provide you with personalized advice, help you maximize your deductions, and ensure compliance with all tax regulations.
