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.