How to leverage income tax credits for renewable energy, home improvements and EVs
The Inflation Reduction Act (”the Act”) of 2022 marks a pivotal moment for individuals seeking to contribute to a more sustainable future, while simultaneously reducing their income tax liability.
This legislation, with a focus on reducing carbon emissions today and creating a more energy-abundant future, also includes substantial revisions and enhancements to income tax credits associated with renewable energy, home improvements, electric vehicles (EVs) and electric bikes.
Individuals stand to gain substantially from these incentives if they understand how to use them effectively. Here, we offer a high-level guide to navigating the landscape of these tax credits.
Originally established in 2005, the Investment Tax Credit, commonly known as the Federal Solar Tax Credit, provides a tax incentive for solar photovoltaic (PV) installation. Under the Act, this tax credit was extended and enhanced. The current benefit is 30% of the value of your installed rooftop solar system.
With the cost of an average home system running around $15,000, this tax credit could be worth over $4,000 or more. The credit is uncapped, so the larger your system, the larger your benefit.
- The solar tax credit can be paired with a similar 30% credit on the value of battery storage installation, meaning no more noisy generators during power outages.
Heating & Cooling
The Act also offers expands tax credits for energy-efficient home improvements. This includes but is not limited to, energy-efficient windows and doors, insulation, HVAC systems, and certain types of roofing. For individuals with one or more properties, this can result in substantial tax savings. It also presents an opportunity for individuals to enhance the value of their properties while reducing their carbon footprint.
- Heat pumps: Most of us are familiar with the large condenser units associated with air conditioners. Modern condensers are called “heat pumps” and can both cool your house and run backward, heating your house using outside air. With recent advances in this technology, some heat pumps can effectively heat your home in outside temperatures down to -20° Fahrenheit. Electrifying your heating and cooling reduces your home’s reliance on natural gas and can dramatically reduce overall carbon emissions.
- The Act provides a 30% tax credit on the value of your heat pump, up to a $2,000 cap.
- Ground Source: like air-source heat pumps, ground-source heat pumps can extract heat from the ground (geothermal) and funnel that into your home. The technology is newer, but costs have fallen & reliability has increased.
- The Act provides an uncapped 30% tax credit on the value of your geothermal heating installation.
- Energy Efficient Retrofits: If your older home needs insulation, windows, or energy-efficient appliances, you may qualify for efficiency rebates. The value of the rebate depends on the cost of your project and the estimated energy savings resulting from the retrofit. In certain circumstances, they can be quite valuable, worth up to 50% of the cost of the retrofit.
Electric Vehicle Tax Credits
The Act provides tax credits available for the purchase of new EVs and may allow an individual to upgrade their transportation method to more sustainable option while also benefiting from a tax break. While qualifying for the credit is somewhat complicated, here are a few takeaways:
- Current or prior-year income needs to be under $300,000 for a family.
- The EV needs to have certain components produced in the USA, and final assembly in the USA. You can find a current list of qualifying vehicles here.
- The tax credit is worth up to $7,500, at the federal level.
- Many states have implemented state tax credits for EV purchases – so the total value available to you may be higher than $7,500. For instance, Massachusetts has a $3,500 state rebate for certain vehicles. So, qualified buyers with qualified vehicles may be eligible for a rebate valued at $11,000 in Massachusetts.
Notably, the Act removes the manufacturer cap previously associated with the electric vehicle tax credit. Now, no matter how many electric vehicles a manufacturer sells, customers can still receive the full tax credit, which makes high-end electric vehicles a more financially attractive option.
The Act has opened new avenues for individuals to mitigate their tax liabilities, support renewable energy, and make sustainable choices in their personal lives. By investing in renewable energy, making energy-efficient home improvements, and choosing electric vehicles, these individuals can align their financial strategies with a sustainable future.