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How to take advantage of brand-new clean energy tax credits » Yale Climate Connections



Imagine it’s a cold February night and your furnace breaks. You want to replace it with an electric heat pump because you’ve heard that tax credits will help pay for the switch. And you know that heat pumps can reduce energy costs and the carbon footprint of your home.

But it turns out that your home needs a new electric panel to support a heat pump. Your house is freezing and you don’t have the time to make that improvement. You’re forced to stick to a gas-burning furnace that will last 15 to 20 years, so you lose out on the tax break and cheaper energy bills — and you’ve locked in fossil fuel pollution from the furnace that will likely continue until the late 2030s or beyond.

This example shows why it’s important to make a plan now to make the most of new federal clean energy tax credits available under the 2022 Inflation Reduction Act, said Sarah Lazarovic, the head of communications and brand at Rewiring America, a nonprofit that advocates for widespread use of clean electricity.

These new tax credits are designed to help consumers move away from highly polluting furnaces, home appliances, and cars in favor of newer, cleaner technology — such as heat pumps, induction stoves, and electric vehicles — that run on electricity.

Lazarovic suggests making a pledge to yourself: “From here on out, everything I buy is going to be electric, because otherwise I’m literally just throwing money away.”

Here are nine items to put on your checklist between now and 2032, the year when tax credits are scheduled to expire or start to decline.

THIS YEAR: Get a home energy audit

Home energy audits help you understand how much energy your home uses and improvements that can reduce that use. The energy-efficient home improvement tax credit will help cover the cost of home energy audits. The credit covers 30% of the cost of a home energy audit and is capped at $150.

“A home energy assessment should be your first step before making energy-saving home improvements, as well as before adding a renewable energy system to your home,” according to the U.S. Department of Energy.

SOON: Find out if you need a new electric panel or need to rewire your home to support heat pumps and other electric appliances

If you have an older home or just aren’t sure if your home is ready to support electrification, contact a trusted electrician or contractor. Tell that person you’re hoping to replace your gas furnace or other appliances with their electricity-based equivalents in the next 10 years. Ask if those upgrades will require a new electric panel or wiring. If so, start that process as soon as you can. That way, if you have any surprise furnace breakdowns, your home will be ready.

The energy-efficient home improvement tax credit will help offset the costs of updating your electric panel and wiring. That credit is worth 30% of the cost, including installation. The full amount you can get for home improvements is capped at $1,200 each year. For more details about this tax credit, check out Rewiring America’s fact sheet.

SOON: Improve insulation in your home

A well-insulated home stays warmer in the winter and cooler in the summer. Improving your home’s insulation reduces your heating and cooling needs, potentially enabling you to purchase a smaller, cheaper heat pump when the time comes.

The Inflation Reduction Act includes a 30% tax credit for energy efficiency improvements, capped at $1,200.

If you’re making other efficiency upgrades, such as updating windows, doors, or your electrical panel, consider spreading those improvements over several years to get the most of the credit. For example, if you used $1,200 worth of credit on insulation in one year and bought new windows that same year, you’d hit the cap with the insulation alone and would miss out on credit for the windows.

OVER SEVERAL YEARS: Replace your windows

Drafty windows are a common source of energy leaks from a home, particularly older residences. The Inflation Reduction Act includes a 30% tax credit for window improvements. As described above, the tax credit for home energy efficiency improvements, which includes electric panel updates, insulation, and efficient doors and windows, is capped at $1,200 each year. Windows alone are capped at $600. It’s important to remember that these caps reset each year.

“If someone were to contemplate replacing all of the exterior windows in their home, they actually may want to do that over several years beginning in 2023,” said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.

OVER SEVERAL YEARS: Replace exterior doors

Like windows, doors can also be drafty and energy-inefficient. And like windows, the tax credit available for doors is 30%. The credit you can get for one exterior door is capped at $250, and $500 is the cap for all exterior doors.

WHEN IT BREAKS: Replace your furnace with a heat pump

Heat pumps can both cool and heat your home. In the summer, they pull heat from the air of your home and move it outside. In the winter, they pull heat from the outdoor air into your home to warm it. Heat pumps are more energy-efficient than conventional air conditioning or heating, and they run on electricity rather than natural gas or oil.

Read: A big source of carbon pollution is lurking in basements and attics

Several different kinds of heat pumps are available, so work with your contractor or energy efficiency professionals to determine which type makes the most sense for your climate and living situation.

The energy-efficient home improvement credit offers a 30% credit for heat pumps, but the tax credit for heat pumps and heat pump water heaters is capped at $2,000 annually. For the most savings, you will likely want to purchase your heat pump and heat pump water heater in separate years.

The average cost of a new heat pump and installation is $5,500, according to Forbes, but prices can vary widely based on the size of the heat pump you need. A 30% credit on that average cost would be $1,650, well below the $2,000 cap. These credits are nonrefundable, so you would need to owe at least $1,650 in tax to get the full credit.

If you need an electric panel upgrade to support either a heat pump or a heat pump water heater, you can get up to $600 in tax credits for that upgrade. As described above, the $600 counts toward a $1,200 total annual cap on improvements, which includes new windows and doors, so you may also want to plan those updates for different years.

WHEN IT BREAKS: Replace your water heater with a heat pump water heater

Heat pump water heaters use electricity to pull heat from the air to warm water. They can be two to three times more energy efficient than conventional water heaters.

The average new heat pump water heater costs between $1,500 and $3,000, according to Forbes. The same tax credit for the heat pump applies to the heat pump water heater. So if you spent $2,000 on a heat pump water heater, you would get a tax credit of $600.

Because the tax credit for heat pumps and heat pump water heaters is capped at $2,000 each year, you may want to plan to purchase them in separate years to get the highest possible credit.

WHEN IT BREAKS: Replace your combustion engine car with an EV

Two credits can help you save on an electric vehicle: The clean vehicle credit applies to new vehicles, and the credit for previously owned clean vehicles applies to used vehicles. Tax experts said that there are lingering questions for the IRS to answer about the requirements vehicles must meet to qualify.

Read: Don’t get fooled: Electric vehicles really are better for the climate

“In most cases, when the IRS comes out with guidance, they tend to not penalize people who went off of original somewhat ambiguous guidance,” O’Saben said. But, he added, if you want to be conservative, you might want to wait for more clarity before purchasing a vehicle.

The clean vehicle credit is for $7,500 and applies to new vehicles that:

  • Are electric vehicles with batteries of at least seven kilowatt-hours or are hydrogen fuel cell vehicles
  • Cost less than $80,000 for vans, SUVs, and pickup trucks, or under $55,000 for all other vehicles
  • Completed assembly in the U.S., Canada, or Mexico. You can check this U.S. government website to see if a specific car meets this requirement.
  • Meet requirements related to where battery components are manufactured and the source of critical minerals used in the batteries. Those requirements will grow more stringent over time.

In addition, the adjusted gross income of the person or people purchasing the car must be under $300,000 if their tax status is married filing jointly, under $225,000 for head of household status, or under $150,000 for single or married filing separately status.

Starting in 2024, you will have the option to transfer your tax credit to the dealer at the time of the sale, reducing the upfront cost of the car. Luscombe said questions remain about how this process will work and how dealers will ensure that buyers are qualified.

If you’re interested in buying a used car, similar restrictions apply — but with lower income and vehicle cost thresholds. Your adjusted gross income must be under $150,000 if your tax status is married filing jointly, or under $75,000 if your filing status is single or married filing separately.

For a vehicle to qualify for the credit for previously owned clean vehicles it must also:

  • Meet the requirements for a clean vehicle used in the clean vehicle credit
  • Have a model year at least two years earlier than the date of sale
  • Weigh less than 14,000 pounds
  • Cost less than $25,000.

This credit is for either $4,000 or 30% of the cost of the vehicle, whichever is smaller.

LONGER TERM: Explore getting a renewable energy system to power your home

Not every home is suitable for a renewable energy system, but if your property can support one, the residential clean energy credit can help you pay for it. Systems that qualify for the credit include:

  • Home solar
  • Qualified battery storage
  • Solar water heating
  • Fuel cells
  • Geothermal heat pumps
  • Small wind energy

The residential clean energy tax credit amount is 30% of the cost of a qualifying system, including installation. After 2032, the credit percentage starts to decline.

O’Saben of the National Association of Tax Professionals said he’s already seeing some price quotes include anticipated tax credits. “When you see a quote for a solar panel project, in the fine print, it’ll say, ‘The final price assumes a 30% credit,’” he said.

The average cost of a home solar system in 2022 was about $26,000, according to Home Advisor, and that cost is expected to fall over time. That price would result in a credit of $7,800. This credit is nonrefundable, so you would need to owe $7,800 in taxes to get the full credit, but unused credits can roll over to the next year.

Read: Three common myths about solar energy, demystified

BONUS TIP: Stay on the lookout for coming rebates

Federal tax credits aren’t the only way to save on clean energy systems, electric vehicles, and home improvements. Rebates expected to go into effect in late 2023 will help cover heat pumps, electric stoves, wiring, weatherization, and more. But uncertainty remains about how the funds will be distributed.

The advantage of these rebates is that they will be point-of-sale discounts — in other words, you’ll pay less upfront rather than waiting until the next time you pay taxes to receive a credit.

If you can afford to wait to replace appliances until the rebates go into effect, especially if you qualify as low-income, factor that into your plan. The rebates are expected to cover 100% of the costs for electrification projects for low-income consumers and 50% for moderate-income consumers. Rewiring America’s Inflation Reduction Act savings calculator can help you to understand which rebates and tax credits could benefit you.

If you are a renter, Rewiring America’s Lazarovic recommended talking to your landlords and advocating for clean energy systems.

In addition to federal credits, many states and utilities also offer clean energy tax credits or rebates. This database will help you find incentives available in your area.

“It seems like a lot because it is a lot. There’s tons of money. There’s tons of decisions to be made,” Lazarovic said. “If you do one thing in the first half of this year, call a contractor or call an electrician to know where you stand for getting your heat pump installed or your new induction stove.”



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