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New Law Helps You Save Money on Energy and Taxes

Inflation Reduction Act expands incentives for green appliances, HVAC, solar and more

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Energy prices have soared 32.9 percent the 12 months ended July, according to the Bureau of Labor Statistics. If you want to whip inflation now, your best bet may be to make your home more energy efficient. The Inflation Reduction Act, signed into law on Aug. 16, provides for tax breaks and rebates to make your savings even larger. If you make energy-efficient changes to your home, you’ll not only save on energy bills, but possibly on your taxes as well.

The tax credits for making your home more energy efficient rev up your savings. Unlike a tax deduction, which lowers your taxable income (and your taxes), a tax credit reduces your taxes dollar-for-dollar. The credits can shrink your federal income tax to zero. However, since these tax credits are what the IRS calls "nonrefundable," they can’t turn a tax bill into a refund check.

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Tax credits for making your home energy efficient

Homeowners have long had a $500 lifetime credit for improvements that increase their home’s energy efficiency. The credit, called the Nonbusiness Energy Property Credit, was equal to 10 percent of the cost of qualified energy improvements, such as insulation, windows, doors and roofing. If you paid $400 for a new energy efficient front door, you got a $40 tax credit, provided you hadn’t already hit the $500 lifetime maximum.

You could also get a credit for 100 percent of the cost of certain energy-efficient models of big-ticket items, such as furnaces, hot water heaters and air conditioners – again, subject to the $500 lifetime limit. If you paid $10,000 for a new furnace, your credit would still be a maximum of $500. The Nonbusiness Energy Property Credit actually expired in 2021, but the Inflation Reduction Act extended the credit into 2022.

Things will get better in 2023. The new credit, called the Energy Efficient Home Improvement Credit, will be for 30 percent of qualifying purchases, instead of 10 percent. Taxpayers can claim up to $1,200 in credits every year, instead of $500 for a lifetime. “A lot of people who had used up their $500 credit years ago can start using it again,” says Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. The new credits will expire in 2032.

Not all improvements will be treated equally: Some have limits. Here’s how much in tax credits you can potentially get from various energy-saving improvements under the new bill.

  • Home energy audit: up to $150
  • Energy-efficient exterior door: up to $250; $500 total
  • Energy-efficient exterior windows, hot water heaters, central air conditioners and furnaces: $600

Heat pumps, heat pump water heaters, and biomass stoves and boilers can get a $2,000 credit, the one category that can be higher than the $1,200 annual limit.

Generating your own electricity

If you spend money on alternative energy, such as wind, solar or geothermal, you’ll also be eligible for a Residential Clean Energy Credit. The credit applies to residential battery storage technology as well. Those credits will increase to 30 percent of qualified expenses since the bill's passing, up from 26 percent before August 2022.

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Let’s say it’s 2023 and you spend $20,000 on rooftop solar panels and $5,000 for a whole-house battery so you can use your electricity on a rainy day. You would get a $6,000 tax credit for the panels and a $1,500 tax credit for the battery.

After 2024, the law will require manufacturers to put a tax identification number on products eligible for the credit. You’ll have to include that number on your return to get the credit for the item. “I think this is an effort by the IRS to determine who’s really entitled to the credit and who’s not," Luscombe says.

Energy rebates

The High Efficiency Electric Home Rebate Program is aimed at getting people to buy more energy-efficient products, such as stoves, electric wiring and heat pumps. To qualify, your family’s income can’t be more than 150 percent of the median income where you live. If the median family income in your area was $50,000, for example, the cutoff limit would be $75,000.

These rebates, funded with federal dollars, will be paid directly to residents by state governments, rather than being claimed on a tax return.. Each state will set up its own system for claiming the rebates. Under the new law, individuals and families can get a rebate of up to:

  • $8,000 for a heat pump
  • $1,750 for a heat pump water heater
  • $840 for an electric stove
  • $4,000 for an updated breaker box

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