Inflation Reduction Act and Tax Credits for Energy-Efficient Home Improvements

If you’re planning a few home improvements that will boost the energy efficiency of your house, you may save some money on your projects now that the Inflation Reduction Act is about to become law. One of the bill’s main goals is to address climate change and slow down global warming. And while the legislation primarily helps businesses adopt more eco-friendly measures and jump-start clean energy production, there are incentives for ordinary Americans to go green and save some green, too.

For example, homeowners will be able to cut their tax bill even more going forward if they install new energy-efficient windows, doors, water heaters, furnaces, air conditioners, and the like. That’s because the legislation extends and enhances two tax credits that reward “green” upgrades to your home. (There are also new tax breaks for the purchase of electric vehicles.) Low- and moderate-income families may also qualify for rebates if they purchase energy-efficient appliances.

Both the U.S. Senate and the House of Representatives have now passed the Inflation Reduction Act. Now it’s off to President Biden’s desk for his signature, which is expected to happen soon. Once it’s signed into law, it will be a little easier going green for American homeowners.

[For more information on tax provisions in the bill, see The Inflation Reduction Act and Taxes: What You Should Know.]

Energy Efficient Home Improvement Credit

One of the tax credits that homeowners may be familiar with – the Nonbusiness Energy Property Credit – actually expired at the end of 2021. However, the Inflation Reduction Act brings it back to life, improves it substantially, and even gives it a new name – the Energy Efficient Home Improvement Credit.

The old, expired credit was worth 10% of the costs of installing certain energy-efficient insulation, windows, doors, roofing, and similar energy-saving improvements in your home. You could also claim the credit for 100% of the costs associated with installing certain energy-efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers, and air circulating fans. However, there was lifetime limit of $500 for the credit (e.g., credits taken in previous years count towards the limit). There was also a $200 lifetime limit for new windows. These limits severely restricted the overall value of the credit. There were also other individual credit limits for air circulating fans ($50); some furnaces and boilers ($150); and certain water heaters, heat pumps, and air conditioning systems ($300). These rules will also apply for the 2022 tax year.

However, starting in 2023, the revised credit will be equal to 30% of the costs for all eligible home improvements made during the year once the Inflation Reduction Act is signed into law. It will also be expanded to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. Roofing and air circulating fans will no longer qualify for the credit, though. Some of the energy-efficiency standards will be updated as well.

In addition, the $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount (the lifetime limit on windows will go away, too). So, if you spread out your qualifying home projects, you can claim the maximum credit each year. The annual limits for specific types of qualifying improvements will also be modified – and for the better. Beginning in 2023, they will be:

  • $150 for home energy audits;
  • $250 for an exterior door ($500 total for all exterior doors);
  • $600 for exterior windows and skylights; central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and
  • $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,200 annual limit may be exceeded).

For eligible home improvements after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the item, and the person claiming the credit includes the number on his or her tax return.

Finally, the revised credit will be extended through 2032.

Residential Clean Energy Credit

The second credit homeowners are eying is the current Residential Energy Efficient Property Credit, which also gets a new name under the Inflation Reduction Act. It will be called the Residential Clean Energy Credit. The credit, which is currently scheduled to expire in 2024, will be extended through 2034 as well.

In addition to a name change and extension, the Inflation Reduction Act will also boost the credit amount. Right now, the credit is worth 26% of the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home. (The credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity.) The credit amount is currently scheduled to drop to 23% in 2023 and then expire in 2024. Under the Inflation Reduction Act, the credit amount jumps to 30% from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.

The scope of the credit is adjusted under the Inflation Reduction Act, too. It no longer applies to biomass furnaces and water heaters, but it will apply to battery storage technology with a capacity of at least three kilowatt hours starting in 2023.

High-Efficiency Electric Home Rebates

Although not a tax credit, the High-Efficiency Electric Home Rebate Program will also help American families go green once the Inflation Reduction Act becomes law. The program will provide rebates to low- and middle-income families who purchase energy-efficient electric appliances. To qualify for a rebate, your family’s total annual income must be less than 150% of the median income where you live.

Qualifying homeowners can get rebates as high as:

  • $840 for a stove, cooktop, range, oven, or heat pump clothes dryer;
  • $1,750 for a heat pump water heater; and
  • $8,000 for a heat pump for space heating or cooling.

Rebates for non-appliance upgrades will also be available up to the following amounts:

  • $1,600 for insulation, air sealing, and ventilation;
  • $2,500 for electric wiring; and
  • $4,000 for an electric load service center upgrade.

There will be limits on the amount certain families can get, though. For instance, a rebate can’t exceed 50% of the cost of a qualified electrification project if the family’s annual income is between 80% and 150% of the area median income. Each qualifying family will also be limited to no more than $14,000 in total rebates under the program.

The $4.5 billion to be allocated for rebates will be distributed to families through state and tribal governments that establish their own qualifying programs. The funds will be available through September 30, 2031.