Did you know federal income tax credits and incentives are available for energy-efficient home improvements? The new program created within the Inflation Reduction Act, passed last summer, is (partially) live. Don’t pass up the thousands of dollars the program could save you!
The Inflation Reduction Act of 2022 introduced federal income tax credits and rebates for improvements increasing the energy efficiency of homes in the U.S. The incentives are available through the year 2032. American taxpayers can qualify for a maximum annual tax credit of $3,200, plus potential rebates.
Energy Efficient Home Improvement Tax Credits
The tax credit side of the new program is in effect now and is regulated by the IRS. The IRS states the tax credit equals 30% of certain qualified expenses, including qualified energy efficiency improvements, residential energy property expenses, and home energy audits. More specifically, the maximum credit claimable each year is:
- $1,200 for energy property costs and certain energy home improvements, with limits on doors ($250 per door up to $500 total), windows ($600), and home energy audits ($150)
- $2,000 per year for qualified heat pumps, central air conditioners, water heaters, electric panels, biomass stoves, or biomass boilers
This maximum credit amount is eligible annually until 2033, with no lifetime dollar amount limit. The credit is nonrefundable, meaning you cannot receive more credit than taxes owed. Excess credit cannot be rolled over to future tax years. To claim the credit, you must file Form 5695, Residential Energy Credits Part II, with your tax return.
For more detailed information on the tax credits, visit: https://www.irs.gov/credits-deductions/energy-efficient-home-improvement-credit
Residential and Homeowner Incentive Rebates
The rebate side of the new program is being developed and will be administered state by state. The rebate amount available will depend on your state of residence and household income. The rebates available will come in two forms, according to the Indiana State Government website, as follows:
- Home efficiency rebates – this program will offer rebates for residential energy efficiency improvements. Rebate amounts will be determined based on energy saved and will vary for single-family residences, multi-family buildings, and low- and moderate-income households.
- Home electrification and appliance rebates – this program will offer rebates for electric appliances. The legislation sets the rebate amounts and is specifically targeted at low-income households.
State governments received new guidance from the U.S. Department of Energy (DOE) in July 2023, so updates on the rebate program should be available at the state level soon.
Home Improvement Game Plan
One helpful tool to help strategize your home improvement game plan is the Inflation Reduction Act calculator at www.rewiringamerica.org. Enter your tax filing status, household size, household income, and zip code to receive an estimate of available incentives (tax credits and rebates) and energy savings per year.
Be sure to research existing state and local programs through utility companies to see if additional savings or incentives are available for energy-efficient home upgrades. In Indiana, AES offers up to $725 on various home improvements, including a tune-up to air conditioning units and upgrading attic insulation.
Once you have a better idea of tax credits and rebates for which you may be eligible, consider scheduling a home energy audit. According to the IRS, the audit must include a report and inspection identifying the most significant and cost-effective energy efficiency improvements, including an energy and cost savings estimate. Additionally, the home energy audit is part of the tax credit program – up to $150 tax credit available for an audit costing $500.
Lastly, given the nature of the tax credits, consider spreading out your home improvement projects to maximize your tax credits annually. Again, tax credits are currently capped at $3,200 per year.
For example, getting your home energy audit and replacing the old water heater and electric panel are 2023 projects. Then 2024 can be focused on air conditioning replacement and weatherization (upgrades to insulation and replacing old doors and windows).
If you plan to upgrade your home, why not take advantage of the new federal tax incentives? While more information is needed on the state-level rebate program, now is a good time to develop your home efficiency game plan to capitalize on tax credits, rebates, and overall energy savings.
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