New and Improved Energy Tax Credits
The Inflation Reduction Act (the Act) of 2022 extends and expands tax credits for making your home and vehicles more energy efficient. Here are a few noteworthy provisions in the Act.
Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit)
The old credit, which is still in effect for 2022 tax returns, has a tiny $500 lifetime cap. Beginning in 2023, the old lifetime cap is gone; and instead, there is a $1,200 overall annual cap on the credit, along with annual caps for certain types of improvements. This credit helps homeowners pay for several types of energy efficient improvements including:
- Exterior windows and doors
- Home insulation
- Heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers
- Biomass stoves and boilers
- Electric panel upgrades
The new credit can be claimed for improvements made to your principal residence or your second home. Consider spreading out qualifying expenses over a number of years to maximize the $1,200 annual credit. The new rules are in effect through 2032.
Residential Clean Energy Credit
This credit is claimed primarily by installing solar panels, but it can also apply to the cost of storage batteries, solar hot water heaters, fuel cells, small wind energy turbines, and geothermal heat pumps installed in your principal residence or second home. The Act extends the credit through 2034 and updates the credit amounts to 26% through 2021, 30% for 2022-2032, 26% for 2033, and 22% for 2034. There is no annual or lifetime cap on this credit. The average solar project costs on a home are over $20,000 so this credit can save you more than $6,000.
New Clean Vehicle Credit (formerly known as the New Qualified Plug-in Electric Drive Motor Vehicle Credit)
The credit maximum remains $7,500 for buyers of new all-electric vehicles and hybrid plug-ins, but now it has two components: a $3,750 credit if the electric vehicle complies with the domestic sourcing requirements for critical minerals used in the battery and a $3,750 credit if the electric vehicle satisfies domestic content requirements for battery components. There are income limits and electric vehicle price caps for claiming the credit. This credit is effective from 2023-2032.
Credit for Previously Owned Clean Vehicles
A qualified buyer of a previously owned clean vehicle is allowed a credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. The credit is available to married filing jointly filers with modified adjusted gross income of $150,000 or less ($75,000 for singles) for the year of purchase and the preceding year. To qualify as a previously owned clean vehicle, the vehicle must be a vehicle that meets the new clean vehicle requirements and is at least 2 years old. This credit is effective from 2023-2032.
Please contact your Ketel Thorstenson tax advisor for more information on how you can take advantage of these credits. See my article “Inflation Reduction Act of 2022 – New and Improved Tax Credits” in the Fall 2022 KT Addition for more information about additional credits included in the Act.