As we transition toward green energy practices and sustainability, governments are introducing financial incentives and credits to encourage energy-efficient technologies and renewable energy sources. With more recent legislation, the United States offers a variety of tax credits to individual homeowners, businesses, and consumers who make eco-friendly choices.
The Inflation Reduction Act: A Game Changer for Energy Tax Credits
The Inflation Reduction Act (IRA), implemented in August 2022, was one of the largest energy policies in U.S. history. The policy offered more than 70 credits to organizations and individuals, who are entitled to a tax credit if a particular project or improvement meets the stated criteria. Some of the most notable changes to energy tax credits were focused on renewable energy production, energy efficiency upgrades, and electric vehicles. Many of these credits will run all the way through 2032, and by implementing this 10-year accessibility the legislation allows time for plans to develop and become implemented. Taxpayers who engage in qualifying projects may use the energy credits to their advantage and increase sustainability within their own company or personal use.
Residential Clean Energy Credit (Formerly Solar Investment Tax Credit)
One of the most significant updates is the expansion of the Residential Clean Energy Credit, which has been extended through 2032. Under the IRA, the federal tax credit for solar panel installations, geothermal heat pumps, wind turbines, and other renewable energy systems has increased to 30% for systems placed in service between 2023 and 2032. This is a return to the original amount of the tax credit that expired in 2009. A few highlights of these credits are:
- 30% tax credit for residential solar, wind, and other qualifying renewable energy systems.
- No maximum credit limit on the cost of the system.
- Includes storage systems such as home battery storage.
- Renters eligibility: Tenants may also claim a credit when qualifying improvements are made to the property they are renting.
Energy Efficient Home Improvement Credit
Homeowners who make energy-efficient upgrades to their properties can now benefit from an expanded Energy Efficient Home Improvement Credit. The IRA increased the allowable credits for qualifying home improvements such as adding insulation, upgrading windows and doors, and installing energy-efficient heating and cooling systems. Some of the new features include:
- $2,000 tax credit for the installation of energy-efficient heat pumps, biomass boilers, and other major systems.
- Up to $1,200 per year in tax credits for energy-efficient home improvements, such as insulation, new windows, or doors.
- Improvements to insulation, doors, and windows are eligible for credits up to $600.
Even though this credit has no lifetime limit, starting in 2025 each item of qualifying property that is placed in service will not be credit-eligible unless the item was produced from a qualified manufacturer. The taxpayer must report a specific PIN for the item on their tax return in order to qualify. As a general rule, any qualifying improvements must be made to the owner’s primary residence in order to claim a credit.
Electric Vehicle (EV) Tax Credit
Another important change in the IRA is the expansion of tax credits for electric vehicles (EVs). With the sudden popularity of EVs, the government is trying to make a steady transition to clean transportation. The new law provides incentives for both new and used electric vehicles. Following are some key provisions:
- Up to $7,500 tax credit for new electric vehicles (2023 or later), subject to income and vehicle price limits.
- Up to $4,000 tax credit for the purchase of a previously owned EV.
- Income limits: For individuals the credit is available to those with adjusted gross income of up to $150,000 for single filers, or $300,000 for joint filers.
- Vehicle price caps: The credit applies to vehicle prices not exceeding $55,000 for cars, and $80,000 for SUVs, trucks, and vans.
- Manufacturing Requirement: Vehicles must meet certain domestic production requirements to qualify for the credit.
This expanded EV credit aims to make electric vehicles more affordable for a broader segment of the population, aligning with the U.S. government’s goal to reduce carbon emissions for transportation.
Key Changes for Businesses
The IRA also includes provisions that benefit businesses, providing financial incentives for companies that invest in clean energy technologies or adopt sustainable practices.
Clean Energy Manufacturing Incentives
The IRA created new tax incentives for businesses that manufacture clean energy technologies such as solar panels, wind turbines, and electric vehicle batteries. $10 billion in tax credits has been allocated to companies that build or expand facilities based on producing clean energy technology.
Deduction for Energy-Efficient Commercial Buildings
A significant change for commercial building owners is the deduction increase for energy-efficient upgrades. Under the IRA, businesses can now claim deductions of up to $1 per square foot for energy-saving improvements such as lighting upgrades, improved insulation, and HVAC systems. This allows businesses to offset the cost of implementing energy-efficient upgrades while reducing their overall energy consumption.
Contact Us Today
Exploring energy-efficient upgrades or clean energy investments? Call us at 203-489-0612 to learn how recent tax credits under the Inflation Reduction Act can help you save money while supporting a more sustainable future.
Written by: Benjamin Errington
