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Home Energy Tax Credits in the Inflation Reduction Act

Home Energy Tax Credits in the Inflation Reduction Act

Learn how programs to use the Inflation Reduction Act to get tax credits on energy efficiency upgrades

Hannah Bastawrose (Seeger)
Hannah Bastawrose (Seeger)
October 2022
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5 Minutes


The Inflation Reduction Act (IRA) passed on August 16, 2022. It includes several energy-efficiency and renewable system incentive opportunities for individuals and businesses. For most consumers, these incentives have one main goal: make it more affordable for homeowners to buy eco-friendly and clean energy equipment.

There is currently a set of smaller incentives in the “Nonbusiness Energy Property” credits. The IRA has expanded the monetary value of the credits and now calls it the Energy Efficient Home Improvement Credit. It will take effect on January 1, 2023.

Additionally, there are now rebates that will be available beginning January 1, 2023 for homeowners that fit within a certain bracket.

Energy Provisions in the Inflation Reduction Act 

The IRA doesn’t just cover home energy-efficiency updates. There are hundreds of pages focused on energy that include building efficiency, transportation, environmental, oceanic, and atmospheric efforts. Not to mention tax credits for local governments plus small and large businesses alike.

Some examples include:

  • Home and Commercial Solar
  • Electric Vehicles
  • Residential Building Clean Energy Incentives
  • Commercial Building Clean Energy Incentives
  • Energy & Water Efficiency for Affordable Housing
  • Clean Electricity, Fuels, & Biofuels
  • Clean Manufacturing
  • Energy Storage
  • Low-Carbon Material Grants

In this article, we will list the incentives that will benefit you the most. 

Household Energy Rebates and Tax Credits in the IRA

The average consumer will gain the most benefit from the rebates and tax credits in the bill. The goal of these rebates is to encourage consumers to invest in energy efficiency. 

Buying energy-efficient appliances means less energy usage. For consumers that means a smaller electric bill. For your local utility that means less demand for energy production.

Home Energy Efficiency Rebates - Up to $14,000 per year

Many rebates that were scheduled to be ending have been extended as well as increased monetarily for updating a home. Individuals can get up to $14,000 in rebates on home purchases from appliances to home improvement projects.

Here is a list of home energy efficiency rebates:

  • Up to $1,750 for a heat pump water heater.  
  • Up to $8,000 for a heat pump for space heating or cooling.  
  • Up to $840 for an electric stove, cooktop, range, or oven; or an electric heat pump clothes dryer.  
  • Up to $4,000 for a breaker box upgrade.  
  • Up to $1,600 for insulation, air sealing, and ventilation.  
  • Up to $2,500 for electric wiring.

Who Qualifies for the Rebates?

Now it gets a little tricky. The amount of rebate you can receive is based on your household income relative to the area you live in. Since this is a federal program, it will be available to everyone, just with some conditions. It is still unclear how people will be able to receive these rebates. It will most likely be rolled into a state program, but that is to be determined.

Each town or neighborhood has what is called an area median income. This is just census data about the income of the people that live in the area. This map of the country shows the area median income of each neighborhood of the whole country.

The IRA limits the full rebates to household incomes that fall within 80% or less than your area median income. Plus up to 100% on the installation. 

For those with an income between 80% and 150% of the area median income. You can receive up to 50% of the cost of a qualified installer and a percentage of the rebate.

NOTE: Homeowners will be able to collect a maximum of $14,000 total in rebates. Household income cannot exceed 150% of the area median income as calculated by the Department of Housing and Urban Development in order to qualify.

Energy Efficient Home Improvement Credits (Tax Credits)

There have been tax credits in place for home improvement projects and renewable energy systems. The IRA extends and increases the tax credits available. There are no limits on household income to receive tax credits.

There are three main categories for the tax credits: home improvement, renewable energy systems, and electric vehicles. Each category has its own limit and does not affect the other.

Home Efficiency Credits - Up to $1,200 per year

For your home, the old credit had a $500 lifetime limit and covered 10% of energy-saving improvements: doors, windows, insulation, etc…

Starting in 2023, the tax credit has been increased to $1,200 and is an annual limit, not a lifetime limit. This means you can implement a qualifying home improvement project every year to receive this benefit. 

The new credit will cover 30% of costs for eligible energy and efficiency improvements. Those improvements now include biomass stoves, boilers, electric panels, and home energy audits. 

Here’s an example of potential tax credits you can receive:

 

However, if you are willing to separate your purchases into separate taxable years, you can double your tax credits. Here is another example:

 

 

A few important things to note about the tax credit:

Each year the limit is $1,200, no matter which of the items under the Home Efficiency Credits you are implementing. In the second example, with separating the improvements into 2 years, take note that 30% of $5,000 is $1,500, not $1,200. Since $1,200 is the max, that is what you received. Technically, if you wanted to extend the benefits even further, you could separate the window project into another year. 

Lastly, this is a tax credit, not a tax rebate. If you owe taxes at the end of the year, this amount will be reduced from the amount you own. If you are expecting a tax refund, then this money will not be added to your tax refund. 

Solar & Energy Storage Credits - No maximum

You’re probably familiar with home solar panels. But, the new talk of the town is energy storage. Energy storage (aka batteries) allows you to take advantage of solar power even when the sun isn't shining. 

The IRA has extended the solar tax credit. Homeowners can get up to a 30% credit for solar and energy storage costs through 2032. They don’t need to be purchased together.

EV Credits - Up to $7,500 per year

With the hike in gas prices, more and more people are looking into electric vehicles. There are some tax credits for new and used EV.

The IRA tax credit allows up to $7,500 for a new EV and $4,000 for a used EV. But, there are some caveats.

The EV car must be less than $55,000, and a truck/SUV/van cannot be more than $80,000. Sorry, no credits for the new electric Porsche.  

There are income limits as well. The buyers cannot make more than $300,000/year on a jointly filed tax return.

The last caveat is a limited one. The IRA increases requirements for the minerals like lithium.  Lithium is used to make EV batteries and must be made here in the US or by free trade partners. This is close to impossible to find currently. 

Yet, there is light at the end of the tunnel. Because of the IRA and the recent infrastructure bill, big changes are coming. There are plans for large and more environmentally friendly lithium mining soon to come to the States. 

How to Claim These Credits

As of now, claiming your home energy upgrades will not change. At the end of the year, you can claim the credits on your tax return. In the past, this requires you to submit Form 5695

It has not been made clear if this process will change. Either way make sure you keep documentation of eligible purchases so that when the time comes you are prepared. In most cases, the vendor should be able to provide you with this type of documentation. 

Other Provisions in the IRA

The Inflation Reduction Act is a large bill. 700+ pages of changes to healthcare, tax, and energy policies. Tucked away our many small lesser publicized provisions and allocations. Here is a list of other, not as talked about sections:

  • Strengthening resilience of rural lands to climate impacts - providing funds to coastal cities who are most impacted by rising waters and the increased hurricane intensity due to climate change
  • Support for Farmers and Ranchers - Farmers and ranchers are not only being impacted by climate change, but by lending programs. The IRA provides support to farmer discrimination through a program called the “Discrimination Financial Assistance”.
  • Revitalizing Energy Communities affected by creating good - paying, union jobs, and supporting workers in coal, oil and gas, and power plant industries - in order to support communities that were built around industries like coal and gas, support for education, training, and manufacturing opportunities will be supplied to revitalize these essential towns.
  • Oceanic, Atmospheric, & Marine Sanctuaries - additional funding for conservation efforts for cleanup of wildlife sanctuaries 
  • Oceanic and Atmospheric Investing for Technological Advancements & Research for Computing Capacity and Forecasting - increases in the intensity and frequencies of weather-related events make forecasting of such events even more important for preparation to save people and infrastructure.
  • Carbon sequestering through technologies and naturally through forests and soils - carbon sequestering is the processes of removing carbon from the atmosphere. Plants and soil do this naturally, so planting more trees and implementing certain soil practices can further reduce carbon emissions. The IRA is also investing in carbon sequestering technologies.