The Inflation Reduction Act (IRA) of 2022 was enacted with numerous policy goals, including making clean energy more affordable. James Chyz, Pugh Professor of Accounting and Wyatt Family Faculty Fellow at the University of Tennessee, Knoxville, Haslam College of Business, explains how individual consumers and homeowners can benefit from several tax provisions aimed at achieving this goal.
“Because these are tax credits, rather than tax deductions, eligible taxpayers can reduce their tax liability dollar-for-dollar,” says Chyz. “They can reduce your tax bill to zero but can’t increase a refund, and any unused credits can’t be applied to future years’ tax bills. Perhaps the best part of the improvement and clean-energy-focused credits is that taxpayers can claim the maximum benefit on qualified expenditures every year until 2032.”
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credited entitles taxpayers to a tax credit of 30 percent of qualified improvements (subject to annual limits) with no lifetime dollar limit. Savvy homeowners can claim the maximum credit every year from January 1, 2023, until December 31, 2032, enabling them to spread home improvement costs across multiple tax periods. The Energy Efficient Home Improvement Credit contains four “sub-credits” with different qualifying expenses and annual credit limits.
The first sub-credit applies to building envelope components. It includes material (not installation) costs of exterior doors (annual credit limit of $500, $250 per door), exterior windows and skylights ($600) and insulation and air sealing materials or systems ($1,200). “Given the high cost of windows and doors, it becomes evident how strategically timing improvements over multiple tax years can maximize credit benefits,” Chyz notes.
The second sub-credit, with a $150 maximum annual credit, pertains to home energy audits performed by a professional who is certified by a qualified program as determined by the U.S. Department of Energy.
The third sub-credit applies to residential energy property such as central air conditioners, water heaters, furnaces and boilers. Taxpayers can receive a maximum credit of $600 per item, including installation. To qualify, the installed property must meet the Consortium for Energy Efficiency’s (CEE’s) highest efficiency tier in effect at the beginning of the installation year.
The fourth sub-credit entitles taxpayers to a credit up to $2,000 (including installation) and applies to heat pumps, heat pump water heaters, biomass stoves and boilers. To qualify, installed equipment must have a thermal efficiency rating of at least 75 percent.
Residential Clean Energy Credit
Like the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit entitles taxpayers to a tax credit of 30 percent of qualified expenditures, has no lifetime limit and can be claimed every year it remains in effect. Initial phase-outs, which begin in 2033, apply to new purchases of solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells and battery storage technology. Qualified expenses for this credit typically include both site preparation and installation, and any state or municipal rebates or subsidies must be applied first to avoid “double-dipping” tax benefits. Taxpayers should check with their vendors and installers to verify that any clean energy property meets the IRS’s required efficiency standards.
Clean Vehicle Credit
The Clean Vehicle Credit applies to the purchase of new and used electric or fuel cell vehicles.
Minimum credits for new vehicles, before phase-outs, are $3,750 with a maximum $7,500 available for vehicles that meet a list of certain criteria. Chyz advises, “The U.S. Department of Energy has a helpful website to determine whether your preferred electric or fuel cell vehicle is eligible.”
For new vehicles, the credit is subject to phase-outs based on adjusted gross income (less than $300,000 for married taxpayers who file jointly and less than $150,000 for all others) and the vehicle’s MSRP (less than $55,000 for cars and less than $80,000 for trucks, SUVs and vans). For used vehicles, the AGI phase-out is $150,000 for married filing jointly and $75,000 for all other taxpayers.
Nearly the same eligibility criteria apply to both new and used electric and fuel cell vehicles. Two key exceptions for used vehicles are age (at least two model years less than the year of the vehicle purchase) and sale price ($25,000 or less).
“Taxpayers interested in these credits should thoughtfully plan their purchase, as both require the taxpayer to retain a ‘time of sale report,’ a copy of which must be filed with the IRS by the dealer where the purchase was made,” Chyz notes.
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Stacy Estep, writer/publicist, sestep3@utk.edu
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