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Regulation and Compliance > Legislation

Inflation Reduction Act Could Spark Surge in Some Home Improvements 

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Most of the provisions in the scaled-back Inflation Reduction Act won’t have a direct tax impact — whether positive or negative — on individual taxpayers. The law does, however, contain some pleasant surprises for individual clients who are interested in environmentally friendly home improvements.

The new law both extends and enhances tax credits for individual taxpayers who install eco-friendly windows, roofing, insulation, air conditioners and other energy-efficient home appliances. Some taxpayers will even qualify for rebates when they buy eco-friendly appliances.

Because the rules for claiming the credit will change over the next few years, taxpayers who are interested in going green should pay close attention to the details when deciding when to make the leap.

Energy Efficient Home Improvement Credit

The Inflation Reduction Act renamed the existing IRC Section 25C nonbusiness energy property tax credit the “Energy Efficient Home Improvement Credit.” While the nonbusiness energy property tax credit technically expired at the end of 2021, the law extends the credit through 2032. 

The old rules for claiming the credit will continue to apply in 2022. For 2022, that means taxpayers are eligible for a credit equal to 10% of the cost of insulation, roofing, windows and other energy-efficient home improvements. They can qualify for a 100% credit for energy-efficient central air conditioning systems, water heaters, furnaces and other home systems.

Under the old rules, unfortunately, lifetime limits applied so that taxpayers were entitled to only a $200 lifetime credit for energy-efficient windows and a $500 lifetime credit for other energy-efficient improvements. Further limits apply to specific types of improvements.

Beginning with the 2023 tax year, however,  the credit will be expanded to equal to 30% of the costs of eligible home improvements made during the year. It will also be expanded to cover the cost of additional energy-efficient property, such as electric panels and equipment, biomass stoves and home-energy auditing. Roofing and air-circulating fans will be removed from the list of qualifying improvements.

The current lifetime limits will be replaced with a more generous $1,200 annual limit, and the $200 limitation for windows will be eliminated entirely.

The annual limits for specific types of qualifying home improvements will also be modified beginning in 2023.

The new limits will be (1) $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, biomass stoves and boilers, (2) $600 for central air conditioners, exterior windows and skylights, electric panels and related equipment, natural gas, propane or oil water heaters, natural gas, propane or oil furnaces or water boilers, (3) $250 for exterior doors (with a cap of $500 for all exterior doors installed) and (4) $150 for home energy audits.

The tax credit applies in the year the project is installed — and installations must meet certain energy-related standards and criteria, which can vary from project to project. The credit isn’t refundable, so it can’t generate a tax refund. But it can be carried forward to future years to offset future tax liability.

Residential Clean Energy Credit

The Inflation Reduction Act also renamed the residential energy-efficient property credit the Residential Clean Energy Credit. Although the residential energy-efficient property credit was set to expire in 2024, the new law extends the credit through 2034. 

Under current law, the credit is equal to 26% of the cost of installing certain qualifying home systems that use solar, wind, biomass, geothermal or fuel cell power to create electricity, heat water or control the home’s temperature (the credit was scheduled to decrease to 23% for 2023). Under the act, the credit amount increases to 30% from 2022 to 2032. It then decreases to 26% for 2033 and 22% for 2034. The credit is set to expire after 2034.

The credit will no longer be allowed, however, for biomass furnaces or water heaters. It will be expanded to include certain types of battery storage technology that has a capacity of not less than 3 kilowatt-hours.

High-Energy Efficiency Home Rebates for Low- to Middle-Income Families

The law also creates new high-energy efficiency home rebates for taxpayers whose household income is less than 150% of the median income for their area of residence. Households with income below 80% of the median area income are eligible for a full rebate (up to the $14,000 cap).

Those with income that falls between 80% and 150% of the area median income are eligible for rebates of up to 50% of their costs (again subject to the $14,000 cap). 

The rebates are designed to encourage taxpayers to buy energy-efficient home appliances. Taxpayers who qualify could be eligible for up to $14,000 in rebates for purchasing energy-efficient water heaters, heat pumps, stoves, washers and dryers, and other household appliances.

Taxpayers may also be eligible for rebates if they cut energy use across their home by certain thresholds These rebates will be administered by state energy offices pursuant to rules established by the Department of Energy.

Conclusion

These credits can provide valuable tax savings for clients interested in installing green home improvements starting in 2023. With some planning, clients can now spread the cost of their energy-related home improvements over a few years to claim the maximum tax credits available each year.

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