Contributor: David Mohimani, Manager, Energy Credits & Incentives Advisory
Enacted in 2022, the Inflation Reduction Act (IRA) was developed to help create a cleaner environment and a more sustainable future for all individuals. The IRA created and expanded tax incentives for individuals who own or rent a home to invest in energy-saving home improvements. These individuals can now earn a percentage of their money spent back through federal energy tax credits. To qualify for these energy tax credits, there are specific requirements that a taxpayer must meet, so it is wise to consult a tax professional before submitting a claim.
The three main energy tax credits the IRA re-established for residential homeowners are the following:
- Residential Clean Energy Tax Credit
- Energy-Efficient Home Improvement Tax Credit
- Clean Vehicle Energy Tax Credit
These energy tax credits were created to raise awareness for sustainable home or automotive upgrades now attainable for many individuals. Taking advantage of energy tax credits can seem like a daunting task. Still, all taxpayers should explore the ways they can qualify for these tax credits because the government is offering to effectively refund some of the costs of investing in energy-saving solutions.
Residential Clean Energy Tax Credit
The Residential Clean Energy Credit was effectively re-established in August of 2022. Due to more resources being allocated to sustainable home solutions, the cost of energy-saving home improvements has decreased, allowing more homeowners access to qualify for this energy tax credit.
This clean energy tax credit equates to 30% of the costs of new clean energy property for an individual’s home installed from 2022 through 2032. The tax credit percentage rate phases down to 26% for properties placed in service in 2033 and 22% for properties placed in service in 2034. Currently, this tax credit is set to expire in 2035.
Individuals can file a claim to qualify for the Residential Clean Energy Property Credit if they invest in qualifying renewable energy solutions for their homes. This is a nonrefundable credit, but individuals can carry forward any unused excess credit and apply it toward future tax years, reducing the overall tax owed.
Qualifications
To qualify, clean energy property must meet these standards:
- Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by your state
- Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase
- Battery storage technology must have a capacity of at least three-kilowatt hours
- Fuel cell property is limited to $500 for each half-kilowatt of capacity
- If more than one person lives in the home, the combined credit for all residents can’t exceed $1,667 for each half-kilowatt of fuel cell capacity
Qualified expenses include the costs of new clean energy property, including:
- Solar electric panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage technology (beginning in 2023)
- Labor costs for onsite preparation, assembly, or original installation of the property and for piping or wiring to connect it to the home may be included
You do not qualify for this credit if you use a property solely for business purposes. The maximum available credit for eligible clean energy expenses when using a property partially for business is as follows:
- Business use of up to 20% receives full credit
- Business use of more than 20% receives credit based on the share of expenses allocable to nonbusiness use
A few items to note:
- Roof trusses and traditional shingles that support solar panels don’t qualify for this credit
- Form 8956 must be filed with your tax return to claim the credit
- When calculating the energy credit, you may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses because they’re considered a purchase-price adjustment
- Energy credit must be claimed when the property is installed, not purchased
Clean Vehicle Energy Tax Credit
The IRA gives individuals an opportunity to save money on clean vehicles by offering incentives for the purchase or lease of electric vehicles (EVs), plug-in hybrid vehicles, fuel cell vehicles, and accompanying equipment like chargers. These vehicles are more efficient than gas-powered vehicles, so you can save hundreds of dollars per year on fuel and significantly reduce pollution. This nonrefundable credit is available to individuals and their businesses.
The maximum credit that can be claimed is $7,500 for vehicles placed in service after April 18, 2023. To receive the maximum credit, the vehicle must meet the criteria for the critical mineral requirement and the battery component requirement. If your vehicle only meets one of the two tests, you will receive half the maximum credit amount of $3,750.
Qualifications
To qualify, you must:
- Buy the vehicle for your own use, not for resale
- Use the vehicle primarily in the U.S.
- Have a modified adjusted gross income (AGI) that does not exceed:
- $300,000 for married couples filing jointly
- $225,000 for heads of households
- $150,000 for all other filers
- The lower modified AGI of the current year or the previous year may be applied
Beginning in 2024, buyers can transfer clean vehicle credits to qualified sellers at the time of sale and use the credit amount as a down payment or a reduction of the manufacturer’s suggested retail price. Please look at the 45+ eligible vehicles regarding eligibility.
A vehicle is qualified for this tax credit if it:
- Has a battery capacity of at least seven kilowatt hours
- Has a gross vehicle weight rating of less than 14,000 pounds
- Is made by a qualified manufacturer
- Final assembly takes place in North America
A few items to note:
- Fuel cell vehicles do not need to be made by a qualified manufacturer to be eligible
- Pre-owned vehicles purchased in 2023 or after are eligible for a tax credit of up to $4,000
- In order for the sale to qualify, the car that you are purchasing must be new, and the seller must report the required information to you at the time of sale and to the IRS
- Form 8936 must be filed with your tax return to claim the credit
- The MSRP for the new clean vehicle may not exceed the following amounts for the following vehicle types:
- Vans: $80,000
- Sport Utility Vehicles: $80,000
- Pickup Trucks: $80,000
- Other: $55,000
Energy Efficient Home Improvement Credit
If you make qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for an energy tax credit of up to $3,200. You can claim the credit for improvements made through 2032, and there is no lifetime dollar limit.
Prior to the IRA, there was a previous version for those making energy-efficient home improvements. The IRA increased the maximum credit amount that can be claimed from $500 to $12,000. Some of the new qualifications established through the IRA are that the credit would now have an annual limit instead of a lifetime limit. Homeowners who do sustainable home improvement projects could qualify for up to a $12,000 back refund if the projects are spread out over 10 years.
Beginning January 1, 2023, the credit equals 30% of certain qualified expenses, including:
- Qualified energy efficiency improvements installed during the year
- Residential energy property expenses
- Home energy audits
The maximum credit you can claim each year is:
- $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors, windows and home energy audits
- $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers
Qualifications
To qualify for this energy credit, building envelope components must have an expected lifespan of at least five years. Qualified components include new:
- Exterior doors that meet applicable Energy Star Credit is limited to $250 per door and $500 total
- Exterior windows and skylights that meet Energy Star Most Efficient certification requirements. Credit is limited to $600 total
- Insulation and air sealing materials or systemsthat meet International Energy Conservation Code (IECC) standards in effect at the start of the year two years before installation
- Labor costs for installing building envelope components don’t qualify for the credit
Home energy audit of a main home may qualify for an energy tax credit of up to $150 if the audit:
- Includes a written report and inspection that identifies the most significant and cost-effective energy efficiency improvements for the home, including an estimate of the energy and cost savings for such improvement
- Is conducted and prepared by a home energy auditor
Requirements must be met for a home energy audit:
- The inspection must be conducted by a qualified home energy auditor, defined as an individual who is certified by one of the qualified certification programs listed on the Department of Energy certification programs or under the supervision of a qualified home energy auditor
- The report must be prepared and signed by a qualified home energy auditor and include:
- The qualified home energy auditor’s name and relevant employer identification number (EIN) or other type of appropriate taxpayer identifying number if the auditor does not have an EIN
- An attestation that the qualified home energy auditor is certified by a qualified certification program and the name of such qualified certification program
When the following property is installed, it qualifies for a credit of up to $600 per item:
- Central air conditioners
- Natural gas, propane or oil water heaters
- Natural gas, propane or oil furnaces, and hot water boilers
- Electrical components needed to support residential energy property, including panelboards, sub-panelboards, branch circuits, and feeders, also qualify for the credit if they meet the National Electric Code and have a capacity of 200 amps or more
Qualified home improvements include new:
- Electric or natural gas heat pumps
- Electric or natural gas heat pump water heaters
- Biomass stoves and boilers
A few items to note:
- You cannot apply any excess from this credit to future years
- Form 5695 Part II must be filed with your tax return to claim the credit
- The home must be your primary residence to qualify
- The same rules listed under the Residential Clean Energy Credit regarding business use of the home apply to this energy tax credit
- Heat pumps, biomass stoves and boilers with a thermal efficiency rating of at least 75% qualify for a credit of up to $2,000 per year
- You may need to subtract subsidies, rebates or other financial incentives from your qualified property expenses since they’re considered a purchase-price adjustment
Your Guide Forward
Cherry Bekaert’s Energy Tax Credits & Incentives team is here to help guide you with choosing the right mix of energy-efficient tax credits you qualify for while seeing you get the maximum tax benefit possible.
