The Inflation Reduction Act included a variety of tax credits aimed at boosting green energy and climate-friendly purchases. While the law was passed in 2022, many of the energy-efficient tax provisions officially went into effect on January 1, 2023. If you are looking to make energy-efficient home upgrades, or if you’re interested in purchasing an electric vehicle, be sure to check out these four tax breaks to make the most of your spending.
Energy Efficient Home Improvement Credit
This credit was originally capped at a total lifetime amount of $500, but it has been expanded by the Inflation Reduction Act. Taxpayers can now claim up to $1,200 annually for certain home improvement expenditures made on a principal residence between 2023 and 2033. Qualifying expenses include:
- Home energy audits
- Qualified energy-efficient improvements such as upgraded exterior doors, windows, skylights, and insulation materials
- Residential energy property expenses including central air conditioners, natural gas, propane, and oil water heaters
Taxpayers can claim 30% of the total amount spent on qualified upgrades. To make it slightly more complicated, each item type has its own credit limit. For instance, exterior doors can only be claimed up to 30% of $250 per door for a total of $500. It’s important to consult with a qualified tax professional to understand your exact credit amount.
Residential Clean Energy Property Credit
This is another credit that allows taxpayers to claim up to 30% on qualified energy-efficient purchases made between 2023 and 2033. The best part: there is no overall limit on the amount of the credit. Qualified expenses include:
- Solar panels
- Solar water heaters
- Fuel cell property
- Battery storage
- Wind turbines
- Geothermal heat pumps
As with the Energy Efficient Home Improvement Credit, all purchases must be installed at a principal residence. Purchases or upgrades made at a business or rental property will not qualify for the deduction.
Energy Efficiency and Electrification Rebates
This rebate program allocates $4.5 billion in funding for home electrification projects. These funds will be distributed to the states and administered through separate programs. Though the specifics of each program are still being developed, these rebates will create point-of-sale reductions in the cost of certain appliances such as heat pump water heaters and electric stoves. Qualifying households can claim up to $14,000 in rebates.
Clean Vehicle Tax Credit
If you’re planning to purchase a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) this year, you may qualify for the clean vehicle tax credit. This is a $7,500 credit for qualified taxpayers and vehicle purchases. It is available to both individuals and businesses as long as the vehicle is not bought for resale and is used primarily in the U.S.
Additionally, the vehicle must:
- Have a battery capacity of at least 7 kilowatt hours
- Have a gross vehicle weight rating less than 14,000 pounds
- Be made by a qualified manufacturer
- Undergo final assembly in North America
- MSRP can’t exceed $80,000 for vans, sport utility vehicles, and pickup trucks
- MSRP can’t exceed $55,000 for other vehicles
Keep in mind that there are restrictions around which vehicles qualify for the credit. For instance, vehicles with minerals or components sourced from foreign entities of concern such as Russia or China will not qualify. Lastly, the credit is phased out for taxpayers with an AGI above certain limits.
Do You Have Questions About Energy Efficiency Credits?
If you are planning to make a major home upgrade, or purchase an energy-efficient vehicle, be sure to do your due diligence on these credits. They could potentially save you thousands in taxes and rebates. If you have questions about how the provisions of the Inflation Reduction Act apply to your unique situation, please reach out to us! At Favor Wealth, we can help you make the most of your spending by proactively managing the tax impact. Contact us at 626-529-0445 or email Ricky directly at email@example.com.
Ricky Biel is founder, wealth manager and Chartered Retirement Planning Counselor℠ professional at Favor Wealth, an independent financial advisory firm serving individuals and families near Pasadena, California. Ricky Biel founded Favor Wealth with a desire to provide unbiased, client-centered, community-based financial advice. Ricky and his team of caring, smart professionals want their clients to feel like they’ve done them a favor, making it easier than ever to accomplish their financial goals by blending proven investment methodologies with creative financial technologies. He is on a mission to help his family of clients feel both a sense of relief and excitement about their future. Favor Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the Favor Wealth team may be able to help, contact them today at 626-529-0445 or email Ricky directly at firstname.lastname@example.org.
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