It’s no secret that inflation has soared in the U.S. — and around the globe — during 2022.
President Joe Biden recently signed the Inflation Reduction Act to help the U.S. economy overcome some of the key challenges presented by inflation, as well as to address the ongoing global climate crisis.
Among other things, the Inflation Reduction Act provides key support and tax incentives for small businesses and residential households to switch to cleaner energy models and use more energy-efficient resources, such as solar power systems and electric commercial vehicles.
In this article, we discuss what the Inflation Reduction Act is and what types of tax credits and rebates you can expect in return for utilizing energy-efficient resources.
What is the Inflation Reduction Act?
The Inflation Reduction Act was signed by U.S. President Joe Biden in September 2022.
Along with making investments to help lower the costs of prescription drugs and healthcare, the Inflation Reduction Act also focuses on reducing energy costs in response to growing threats from climate change.
Specifically, the act outlines three key ways it will help to support small businesses and residential households during inflation:
- Maintaining lower healthcare costs
- Supporting energy-saving investments
- Bolstering supply chain resiliency
The support for energy-saving investments will largely be provided via tax credits, with key energy cost reductions including:
- Providing a tax credit to small businesses that cover 30% of the cost to switch to a low-cost solar power system — this type of system can lower operational costs and protect the business against volatile energy prices.
- Enabling small businesses that own buildings to receive up to $5 per square foot in tax credits to improve energy efficiency and lower utility bills.
- Offering a tax credit to small businesses that operate large vehicles that cover 30% of the purchase expenses for commercial vehicles that use clean energy, such as electric vehicles and fuel cell models.
What are Two Types of Energy Efficiency Incentives?
When it comes to how tax authorities will provide energy efficiency incentives to small business owners, there are two main types of tax incentives offered: tax credits and tax rebates.
A tax credit is a reduction of the total amount of taxes you owe at the end of the year.
Comparatively, a tax rebate is essentially a refund of taxpayer money in response to retroactive tax decreases. For instance, if a small business owner were to spend business funds to switch to a solar panel power system, energy tax rebates could return a portion of those funds to the business owner.
Here’s an overview of the tax credits and rebates available for the 2022-2023 tax season:
Energy Efficiency Rebates 2023
Most of the energy efficiency rebates available in 2023 come from two programs: the High-Efficiency Homes and Rebates Act (HEEHRA) and the HOMES Rebate Program.
HEEHRA was written to help low and middle-income households switch from fuel-based power to electric power. For example, installing a heat pump could qualify a household for this rebate. Meanwhile, the HOMES Rebate Program provides states with more than $ billion to help state residents upgrade their entire homes to be more energy efficient.
How to Qualify for Energy Efficiency Rebates?
To qualify for either HEEHRA rebates or the HOMES Rebate Program, there are a variety of requirements that must be met.
The HOMES Rebate Program is currently still in development, with the tax rebates not yet available to benefit residents. According to standards set by the Inflation Reduction Act, the HOMES Rebate Program should provide support to home upgrades that begin after the passing of the act — however, the standards on how to deal with or qualify for retroactive rebate claims are not yet set.
As for the HEEHRA program, qualification for the rebate requires you to make 150% or less of the median income in your area determined by the Department of Housing and Urban Development.
HEEHRA Rebate Amounts for Appliances & Non-Appliances
In total, the HEEHRA rebate program caps total rebate amounts at $14,000.
However, there are additional income-based limits. While both low and middle-income households can only receive a maximum of $14,000, tax authorities will also assess how much of their electrification project costs are covered. Low-income households can have 100% of their project costs covered by rebates and middle-income households can have up to 50% of their costs covered.
For example, let’s say an electrification project costs a total of $14,000 for a low-income household — under the stipulations of HEEHRA, that would qualify for the full $14,000 rebate.
If a middle-income household completed a similar project costing a total of $14,000, they would only receive a maximum of $7,000 in tax rebates, as middle-income households only qualify for rebates that cover 50% of total project costs.
Here is a breakdown of all the specific HEEHRA rebate caps for appliances and non-appliances:
- $1,750 for a heat pump water heater
- $8,000 for a heat pump for space heating and cooling
- $840 for electric stoves, cooktops, ranges, ovens, and electric heat pump clothes dryers
- $4,000 for an electric load service center upgrade
- $1,600 for insulation, air sealing, and ventilation
- $2,500 for electric wiring
Energy Efficiency Tax Credits 2023
As part of the Inflation Reduction Act, one of the key changes made was an extension of the availability of residential energy efficiency tax credits from 2022 through 2032, as well as expanding and creating new tax credits for 2023.
The base tax credit offered in 2023 will provide credit for the total costs for eligible home improvements. The tax credits for specific improvements include:
- 30% credit for installing energy-efficient insulation, windows, and doors
- 100% credit for installing energy-efficient water heaters, heat pumps, central air cooling systems, furnaces, and hot water boilers
- An annual limit of $1,200 for credit amount or a $2,000 credit limit for heat pump water heaters, heat pump space heaters, and biomass stoves and boilers.
- An expansion of the 30% credit to include certain biomass stoves and boilers, electric panels and related equipment, and home energy audits
A second energy credit available is the Residential Energy Efficient Property Credit, which the Inflation Reduction Act renamed to the Residential Clean Energy Credit. This credit was originally intended to expire in 2024 but has now been extended to 2034.
Through the updated version of this credit, residential homeowners can receive up to 30% credit for the installation of qualifying systems that use solar, wind, geothermal, biomass, or fuel cell power.
Who Can Claim Energy Efficient Home Improvement Credits?
To claim an energy-efficient home improvement tax credit, you need to have made energy-saving improvements to your principal residence within the most recent taxable year.
The extension of the tax credits into the 2030s is meant to encourage more homeowners to take advantage of these benefits and install energy-efficient equipment, appliances, and non-appliances.
Can You Qualify for Both Incentives?
While you can qualify for both incentives, you are more likely to qualify for the tax credits than the tax rebate, depending on your total household income.
The tax rebate incentives put stricter limits on who can qualify based on income, requiring a household to make 150% or less of the median income in their area.
Energy Efficiency Tax Credits and Rebates by Project
The total amount of tax credits or rebates you can earn are capped at $1,200 and $14,000, respectively.
However, there are also specific caps and requirements for each type of home or business improvement you complete. Having a clear understanding of the credits available for specific projects is key to planning an energy-efficient home improvement project optimally.
Here is a breakdown of the energy-efficient tax credits by the project:
Tax Credits for Geothermal Heat Pumps
Geothermal heat pumps are used for heating and cooling indoor areas. These types of heat pumps concentrate naturally existing heat found in the ground, rather than producing heat through the use of combustible fossil fuels.
The tax credit for geothermal heat pumps is worth 30% of the costs through 2032, dropping to 26% in 2033 and 22% in 2034. The 30% tax credit can be retroactively applied to installations placed in service on January 1, 2022, or later.
Heat pumps are also qualified for the up to $8,000 tax rebate, with varying additional requirements based on the tax rebate rules for household income.
Tax Credits for Non-Solar Water Heaters
One of the biggest appliances that the U.S. government is striving to increase the use of is heat pump water heaters. Households at all income levels can potentially benefit from these tax credits that are as follows:
- $1,750 for households with an income less than 80% of the area median income (AMI), including 100% of equipment and installation costs
- $1,750 for households with an income between 80% to 150% of the AMI, including up to 50% coverage of equipment and installation costs
- 30% tax credit worth up to $2,000 per year for households with an income at or above 150% AMI
Tax Credits for Windows, Doors, and Skylights
Windows, doors, and skylights play a vital role in increasing a home or building’s energy efficiency. Without the proper airtight design, these features can easily diminish the home or building owner’s energy efficiency efforts, making them crucial to include when planning a home improvement project.
Through the energy efficiency tax credits and rebates, the following credits are available:
- Households with income less than 80% of the AMI can receive a 30% tax credit worth up to $600 per year for exterior windows and skylights, $250 per year for one exterior door, and $500 per year for all exterior doors.
- Households with income between 80% to 150% of the AMI can receive a 30% tax credit worth up to $600 per year for exterior windows and skylights, $250 per year for one exterior door, and $500 per year for all exterior doors.
- Households with income at or above 150% of the AMI can receive a tax credit worth up to $600 per year for exterior windows and skylights, $250 per year for one exterior door, and $500 per year for all exterior doors.
Tax Credits for Electric Stoves
Gas stoves present real problems for the environment thanks to the emission of certain fumes that can cause environmental and health problems. Thus, electric stoves are included within the U.S. government’s efforts to reduce the impacts of climate change and non-environmentally-friendly appliances.
Here are the tax credits for electric stoves, available only for households with 150% or less of the AMI:
- Households with income less than 80% of the AMI can receive an $840 rebate for 100% of equipment and installation costs.
- Households with income between 80% to 150% of the AMI can receive an $840 rebate for up to 50% of the equipment and installation costs.
Tax Credits for Home Energy Audits
Home energy audits are a professional assessment of your home’s energy efficiency, including the identification of where crucial improvements are needed. These audits can include an assessment of potential toxins and fume sources, such as appliances that can emit dangerous fumes.
Households at all income levels can receive a 30% tax credit up to $150 per year for home energy audits.
Tax Credits for Insulation
Like with well-sealed and airtight windowns and doors, proper insulation can make a huge difference in boosting a home’s energy efficiency.
Here are the tax credits available for insulation, air sealing, and ventilation:
- Households with less than 80% of the AMI can receive a $1,600 rebate for 100% of the equipment and installation costs
- Households with between 80% to 150% of the AMI can receive a $1,600 rebate for up to 50% of the equipment and installation costs
- Households with more than 150% of the AMI do not qualify for this rebate
Inflation has made the cost of living reach new highs, with many households and small businesses considering how they may weather the current economic storm.
The Inflation Reduction Act offers a variety of expanded tax credits and rebates for consumers to carry out energy-efficient improvements. Not only do these improvements contribute to climate stabilization efforts but they also provide consumers with a meaningful way to lower their annual tax bills.
Both the HEEHRA and the HOMES programs are still awaiting official guidance from the Department of Energy on how to proceed and guidelines may vary between states. The best way to make sure you are not missing out on credits or updates is to work with professional tax and energy service providers who have specialized knowledge on the topic and can guide you in the right direction.