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Inflation Reduction Act: Support Clean Energy, Get Thousands in Tax Credits

Couple admiring their rooftop solar panels

The Inflation Reduction Act (IRA) of 2022 earmarks hundreds of billions of dollars to curb inflation by reducing the deficit, reducing drug prices for people with Medicare, promoting clean energy, and investing in domestic energy production and manufacturing. This includes $391 billion to fight climate change by reducing carbon emissions by roughly 40% by 2030—the largest such investment in U.S. history. The federal law also offers tax credits to Americans investing in clean energy and energy efficiency projects. Here’s how you can take advantage of the 2022 IRA to help the environment and save money at the same time.

 

HOW DO TAX CREDITS WORK, AGAIN?

Tax credits reduce how much you owe in taxes dollar for dollar. Whereas tax deductions lower your taxable income, tax credits directly lower your tax bill. So, if you owed the government $3,000 in federal income taxes, a $500 tax credit would mean you only owe $2,500. This includes what you’ve paid throughout the year in payroll or self-employment taxes, which could mean a sizeable tax refund for you!

There are two types of tax credits: refundable and non-refundable. With refundable tax credits, you might end up getting money back. If your tax credit exceeds what you owe in taxes, you get the difference back. Non-refundable tax credits, on the other hand, can only reduce your taxes to zero, even if they are more than your tax liability.

For the IRA, all the tax credits are non-refundable (unfortunately). Some credits allow for a ‘carry-forward’ provision so you can claim unused credit over multiple tax years. Nonetheless, zeroing out your taxes for the year isn’t too shabby. Put another way, if you line up your purchases appropriately, you can essentially invest your tax payment into clean energy for your home.

With that understanding of tax credits, let’s dive into how you can qualify for the tax breaks available through the 2022 IRA.

 

ENERGY EFFICIENCY PURCHASES

Here are a few of the qualifying purchases that you can make to capitalize on the Energy Efficient Home Improvement Credit.

  • Building envelope components such as weatherization, insulation, air sealing materials, exterior windows, doors, skylights.
  • Home energy audits to identify priority improvements.
  • Residential energy property including central air conditioners, natural gas, propane or oil furnaces, boilers, and water heaters.
  • Heat pumps, biomass stoves and boilers with a minimum thermal efficiency rating of 75%.

How much is the tax credit worth?

For the next decade, you can get up to $3,200 in non-refundable tax credits—per year. That’s right, the only limit on the number of tax breaks you can get is the number of years between now and 2032. The amount is based on 30 percent of your energy expenses for that tax year, with $2,000 of the maximum total reserved specifically for biomass stoves and boilers. You can reach the $1,200 in tax credits with $4,000 worth of qualifying home energy improvements.

In terms of specific purchases, you can get up to $500 for new doors, $600 for exterior windows and skylights, and $150 for a home energy audit, to name a few examples. If you plan well, you can string different purchases together to reach your $1,200 (or $3,200) maximum. Be aware that the Energy Efficient Home Improvement Credit does not carry forward if you don’t have sufficient tax liability to claim all of the credit. However, there is no lifetime limit so you can complete projects over multiple years and claim the full amount every year that you make eligible improvements. The Internal Revenue Service (IRS) lists more detailed eligibility requirements and tax credit amounts on their website.

How can I claim this tax credit?

Fill out and submit Form 5695 with your tax return.

 

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CLEAN ENERGY PURCHASES

Adding these clean energy sources to your home also nets you a tax break. The purchases cannot be previously owned clean energy property.

  • Solar, wind, and geothermal power sources.
  • Fuel cells.
  • Batteries for clean energy storage.
  • Labor costs, wiring, and piping to connect to the home are eligible expenses, but not traditional building components that primarily serve as roofing or structural function.

How much is the tax credit worth?

The Residential Clean Energy Credit is also worth 30 percent of your total project expenses during the year it’s installed. Except with this tax credit, there’s no annual limit. So, no matter how much you invest in clean energy improvements for your home, you get 30 percent back in tax credits.

As an example, if you invest $30,000 in a solar project for your home, you’ll be eligible for a tax break of $6,000 for that year of installation.

You can also apply for any unused portion to reduce your tax liability over multiple tax years. Put another way, you can invest each year in eligible projects with no lifetime limit, and carry forward any unused credits into future tax years. That just might change the math on whether solar is worth it for you, or other such improvements.

How can I claim this tax credit?

Fill out and submit Form 5695 with your tax return.

 

ELECTRIC VEHICLES

You can earn a non-refundable tax credit for buying a new all-electric, plug-in hybrid, or fuel cell electric vehicle. To qualify, the vehicle must meet several technical criteria related to assembly, weight, battery capacity, and mineral and battery component sourcing. The manufacturer suggested retail price (MSRP) also has to be no more than $55,000, or $80,000 for vans, SUVs, and pickup trucks.

In other words, it’s best to speak with your dealer or use this tool from the U.S. Department of Energy to understand if the EV you’re interested in will qualify.

Don’t fret, because used EVs can also qualify. You just need to purchase it from a licensed dealer for $25,000 or less and meet certain other eligibility requirements related to the model year and your modified adjusted gross income.

State and utility incentives may also be available on top of tax credits through the 2022 IRA. Drive Electric Vermont is an excellent resource to learn more about what rebates you can get when buying an EV!

How much is the tax credit worth?

You can earn up to $7,500 in non-refundable tax credits with the purchase of a qualifying EV. It’s simpler if the vehicle goes into service after April 18, 2023. In that case, it’s $3,750 each for meeting critical mineral and battery sourcing requirements. (If you purchased a new EV between January 1 and April 17 of this year, the math is a little more complicated, but you can still get to $7,500 in tax credits!)

As for used EVs, you can earn tax credits equal to 30 percent of the sales price, up to $4,000.

How can I claim this tax credit?

Fill out and submit Form 8936 with your tax return.

 

If you’re looking to tackle a home energy improvement project or buy an EV, be sure to talk to your accountant or tax preparer about what non-refundable tax credits you can claim through the 2022 IRA. You can reduce your tax liability and invest these dollars in clean energy that will make positive change and return savings for many years to come.

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About Laurie Fielder

Laurie directs VSECU’s VGreen energy savings loan program. Previously, she worked for the weatherization program at the Central Vermont Community Action Council (now Capstone), and for a successful residential solar installer. She enjoys helping Vermonters learn about efficiency and renewable financing options that maximize the savings of these smart investments. She lives in Woodbury with her family and enjoys the outdoors, walking the dog, and tackling home improvement projects.
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