The Inflation Reduction Act (IRA), passed in 2022 as the most expansive climate change legislation in US history, contains a plethora of incentives for consumers to conserve energy and save on their tax bill. The law, which took effect in the 2023 tax year, consolidates several previous green energy-related tax credits—reinstating some that had expired, enhancing others, and creating several new opportunities for homeowners and purchasers of electric vehicles.
We spoke recently with Zach Gordon, Leelyn Smith’s Director of Tax Services, about how to make the most of these new green energy credits.
1. Be a careful shopper to qualify for credits.
The Energy Efficient Home Improvement Credit, which replaces the expired Nonbusiness Energy Property Credit, is a big step up for homeowners, moving from a $500 lifetime credit for installing energy-efficient insulation, windows, doors, and appliances, to a $1,200 annual credit. The $1,200 credit is based on a 30% credit for the costs of all eligible home improvements with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150). If a taxpayer installs qualified heat pumps, biomass stoves or biomass boilers, they may claim an additional $2,000 per year. Taken together, installing energy-efficient products and heating/cooling systems can net a total tax credit of $3,200 per year.
The credit is nonrefundable, which means you will not get a refund if the credit amount exceeds the amount that you owe in taxes. You also cannot apply any excess credit to future tax years. Therefore, be sure to plan home improvement projects over several years to maximize the annual credit. Remember, unlike tax deductions that reduce your adjusted gross income (AGI), tax credits lower your total tax owed on a dollar-for-dollar basis.
To ensure your purchase qualifies, the government has expanded the information and qualifying product selection from private suppliers on its ENERGY STAR website. This site is also a great resource for authoritative information from the IRS and Department of Energy on the range of green credits available and how to claim them.
Vendors and suppliers of energy efficient products and services, such as a qualifying home energy audit, are more involved in the purchase process than ever before. We encourage you to speak with these suppliers, leverage the EnergyStar website, or contact your Leelyn Smith tax professional to make sure the money you spend on home improvements qualifies for available tax credits. In addition, be sure to obtain product identification numbers and keep a copy of the sales invoice for your tax file.
2. Earn additional credits by upgrading HVAC systems.
In addition to the eligible products listed above, taxpayers can claim up to 30% of the project cost up to $600 for qualified ENERGY STAR certified gas furnaces. To qualify, furnaces need to have an annual fuel utilization efficiency (AFUE), a measure of how efficiently a furnace converts fuel into heat, of more than 97%. For central air conditioners, you can also claim 30% of the project cost up to $600 for ENERGY STAR certified equipment with a seasonal energy efficiency ratio (SEER) of more than 16.
3. Target specific credits for solar and renewable system installations.
The Residential Clean Energy Credit applies specifically to home-based renewable energy systems. It allows homeowners to take a credit of 30% of the cost of installing rooftop solar panels, solar water heaters, geothermal heat pumps, and small wind turbines as well as fuel cells and battery storage. The 30%, which applies to systems installed between 2022 and 2032, represents a step up from the 26% credit in place in 2020 and 2021. The installations of all systems except fuel cells carry the extra benefit of enabling tax credits for both a principal residence and a second home owned by the taxpayer. The credit is nonrefundable, but excess unused credits can be carried forward to offset your taxes in future years.
4. Don’t give up on electric vehicles.
Demand and pricing for electric vehicles have fallen sharply over the past year, but the tax incentives to go green with the purchase of an EV remain—and have improved in some cases—with the Clean Vehicle Credit. The IRA also introduced a credit for the purchase of used EVs for the first time.
If the EV you purchase is both assembled and its critical mineral components are processed in North America (read the guidelines here), new vehicles earn a $7,500 credit. Prior to the IRA, car makers like Tesla did not qualify for the credits due to production limits. That cap is now gone.
To qualify for the credit, your modified AGI may not exceed $300,000 for married couples filing jointly or a qualified surviving spouse, $225,000 for heads of households, or $150,000 for all other filers. Starting in 2024, new car buyers can take the credit at the point of sale rather than as a tax credit, making it a direct reduction of the sticker price. In a point-of-sale transaction, the dealership will send purchase documentation to the IRS, which buyers then confirm on their tax return.
The purchase of used EVs can earn a 30% credit on the sales price up to $4,000 if all requirements are met. The vehicle must cost $25,000 or less, be at least two model years prior to the date of purchase and be purchased from a qualified dealership that can properly document the sale. This credit can only be claimed once every three years and, due to the lower qualifying AGI limits ($150,000 for married couples, $75,000 for single filers).
5. Small business owners may also qualify.
All the green energy credits previously mentioned apply to individual and joint tax returns. These credits may also apply to business purchases, but the rules for business deductions—like buying a Ford F-150 Lightning for a construction company—are different. To better understand the nuances of tax credits for business owners and to maximize your available benefits, we recommend reaching out to your Leelyn Smith tax advisor.
Your advisor can also be a good resource to ensure that your annual tax planning takes full advantage of all the available credits made possible through the IRA. It is never too early to start tax planning, and we often find that the sooner you start, the more savings you may accrue come filing time.
If you are planning home improvements or an EV purchase soon, we encourage you to review the energystar.gov website, talk to your CPA if you have questions, and make sure you are purchasing qualifying products, services, and EVs.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.