The Focus - Our Tax E-Newsletter
Energy Credit Incentive Updates
Many Americans are feeling the pinch from soaring inflation: skyrocketing grocery bills, gas bills that reached new heights, and supply chain issues are just a few of the many problems that impact us. It’s more important than ever to find ways to save and put a few greenbacks in our pockets. The recent signing of the Inflation Reduction Act contains a few green tax provisions that can help improve personal and corporate carbon footprints, as well as save a lot of money.
The Inflation Reduction Act brings back the Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit) in 2022 for adding energy-efficient improvements to your main home, but has notable limitations, namely a lifetime limit of $500 subject to various restrictions.
In 2023, this $500 lifetime limit is being replaced with a $1,200 annual limit. The credit percentage increases from 10% to 30% of costs on eligible home improvements.
The Residential Clean Energy Credit
The Residential Clean Energy Credit (formerly referred to as The Residential Energy Efficient Property Credit) is extended through 2034. The credit increases to 30% (formerly 26%) from 2022 to 2032. The credit drops in 2033 back to 26%, and then to 22% in 2034. In 2022, qualifying costs include installing qualifying systems using solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water, or regulate the temperature in homes. In 2023 the credit will no longer apply to biomass furnaces and water heaters. However, in 2023 it will apply to storage batteries with a capacity of at least three kilowatt hours, irrespective of energy source (no longer mandating it be onsite solar only).
How to Claim Credit
The procedure for claiming these credits is the same in 2022 and 2023, being claimed on the purchaser’s individual income tax return. For 2022 and 2023 taxpayers do not need to attach specific documentation with their tax returns to claim the credit. However, taxpayers should always retain documentation in their tax records with proof of eligible property, in case there is ever an IRS audit.
After 2024, credit will only be granted to taxpayers who include the manufacturer provided identification number of any qualified purchased item on their tax return.
High-Efficiency Electric Home Rebate Program
Starting in 2023, low to middle class families who purchase energy-efficient electric appliances may be able to take advantage of the $4 billion High-Efficiency Electric Home Rebate Program (runs through September 30, 2031). State and local governments will establish their own programs, and qualifying families are limited to no more than $14,000 in total rebates. A taxpayer's annual income has to be less than 150% of the median income where they live in order to qualify. If a family's annual income is between 80% and 150% of the area’s median income, the rebate cannot exceed 50% of the cost of a qualified electrification project. The following are some of the qualifying rebates:
- $840 for a stove, cooktop, range, oven, or heat pump clothes dryer
- $1,750 for a heat pump water heater
- $8,000 for a heat pump that can both heat and cool homes
- $1,600 for insulation, air sealing, and ventilation
- $2,500 for electric wiring
- $4,000 for an upgrade of an electrical panel
Electric Vehicle Credits
Starting January 1, 2023 the Inflation Reduction Act will institute changes for electric vehicle related credits:
- There will no longer be a limit on the number of cars that have been sold by a manufacturer.
- Purchasers will get up to a $7,500 credit for a qualifying new vehicle, and up to $4,000 for an eligible used one. The credit applies to plug-in hybrid cars, as well as full electric vehicles, as long as minimum battery capacity requirements are met.
- A nice change is that this credit effectively works as a rebate for consumers as opposed to a credit. Instead of filing a tax return to get the money back, the rebate is to be applied when the vehicles are purchased, lowering the actual price of the car sold at the dealership.
Who Qualifies for the the Electric Vehicle Credit?
- The modified adjusted gross income of the buyer must be less than or equal to $150,000 for single filers, $300,000 for married couples filing jointly, and $225,000 for those filing as head of household.
- There are limitations on the manufacturer’s suggested retail price (MSRP): it must be below $55,000 for sedans, as well as below $80,000 for vans, trucks and SUVs to be eligible for the credit on new vehicles. In order to get the tax credit, vehicles have to be manufactured in North America and powered by batteries whose materials are sourced from the U.S., or its free trade partners.
The Alternative Fuel Refueling Property Credit
The Alternative Fuel Refueling Property Credit was set to expire after 2021, but has been extended through 2032. The credit is worth 30% of the costs of qualified property installed in the home, up to $1,000. Qualifying purchases include:
- At home charging equipment for electric vehicles
- Bidirectional charging equipment. This charges electric vehicle batteries, then allows you to discharge electricity from the battery back out to the electric grid.
- Equipment used to store or dispense alternative fuel for motor vehicles, other than electricity.
The Inflation Reduction Business Incentives
The Inflation Reduction Act also included businesses incentives. Qualifying tax credits include:
- Energy production and investment in technologies including wind, solar, as well as geothermal energies were extended.
- For energy efficiency in commercial buildings there is an expanded tax credit.
- New energy credits were established for power-generating facilities with greenhouse gas emission rates at or below zero, production of clean hydrogen, sustainable aviation fuel, and the purchase of qualified commercial clean vehicles for business or for lease to others.
2023-2032 Green Tax Provisions
- Air circulating fans and roofing expenditures will no longer qualify for the credit.
- The annual $1,200 limit increases to $2,000 for a biomass stove or boiler, as well as electric or natural gas heat pumps or heat pump water heaters put in the home.
- Certain items will have an annual cap within the $1,200 annual limit such as:
- $150 for the cost of a home energy audit
- $500 for exterior doors
- $600 for exterior windows and skylights, central air conditioners, electric panels plus certain related equipment, natural gas/propane/oil water heaters, and natural gas/propane/ oil furnaces or hot water boilers
There has been a natiowide push to switch people to clean energy the past few years. Hopefully riding this green energy wave and taking advantage of some of the provisions in the recent Inflation Reduction Act can get you closer to putting yourself back in the driver's seat.
Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.