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Wednesday, October 4, 2023
Oct. 4, 2023

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Green credits can stack up

How homeowners can cash in on the new Inflation Reduction Act stimulus package


Households can save thousands of dollars on air conditioning, heating, appliance, and energy audits by taking advantage of green energy incenvtives within the Inflation Reduction Act signed last week by President Joe Biden.

One of the most valuable green energy incentives in the legislation is a 10-year extension of a federal tax credit that reduces the cost of installing a rooftop solar system by 30 percent.

The act also extends a $7,500 tax credit for electric and other green energy vehicles, but imposes new North American assembly rules that immediately disqualified some previously eligible models.

On top of the tax credit savings, Americans who take advantage of all upgrades incentivized in the act — installing a modern electric heat pump to cool and heat their home, a heat pump for water heating, rooftop solar, and replacing doors and windows — will save $1,800 a year on energy bills, according Rewiring America, a nonprofit organization “focused on electrifying everything in our communities.”

Some of the incentives, which consumers will be able to subtract from their 2022 tax bills next spring, took effect on Aug. 16, the day Biden signed the $739 billion act. Some won’t take effect until Jan. 1. Others, including two separate packages of rebates for energy saving upgrades, won’t be available until states set up a process to accept and review applications.

It’s important to know that a tax credit is different from a tax deduction. While a tax deduction is subtracted from taxable income, a tax credit is subtracted from the amount of tax owed and can result in a hefty refund or a smaller tax payment at filing time.

Here’s what we know so far about green energy incentives enacted as part of the Inflation Reduction Act:

Rooftop solar systems

The federal tax credit for purchase and installation of residential solar energy systems has been increased from 26 percent to 30 percent and extended through 2032. That means that a homeowner who spends, for example, $20,000 on a solar system at any time over the next 10 years will be able to subtract $6,000 from the taxes they owe for that year.

Before the new law was enacted, the credit was set to be reduced to 23 percent in 2023 and eliminated the following year.

The 30 percent tax credit took effect immediately and can be applied retroactively to installations since Jan. 1.

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There’s no cap on how much a solar system can cost to be eligible for the 30 percent credit. If you spend $100,000 on your system, for example, you’ll get a $30,000 credit. It’s a nonrefundable tax credit, though, meaning you won’t get a $25,000 refund if your tax bill is only $5,000. But, continuing our example, you will be able to carry forward that remaining $25,000 credit and spread it over future tax years through 2032.

Backup battery storage

Starting next year, homeowners with existing solar systems will be able to claim a 30 percent tax credit for adding a backup storage system with a capacity of at least three kilowatt hours.

Erin Hellkamp, spokeswoman for Solar United Neighbors, a nonprofit that amasses groups of homeowners to negotiate bulk deals with solar installers, said the tax credit can also be claimed by homeowners who install backup battery systems without solar panels. Standalone systems can be used to keep power flowing during outages or to cut costs in areas where utilities charge higher rates during peak-usage periods.

Energy Efficient Home Improvement Credit

Home improvement credits will change significantly from 2022 to 2023.

For the remainder of 2022, the new law revives a 10 percent credit for specific energy-efficient improvements, including insulation, roofs, doors, and windows. Homeowners could claim credits totaling no more than $500 over their lifetime for qualifying water heaters, heat pumps, central air conditioning systems, air circulating fans, hot water heaters, and hot water boilers.

Starting in 2023, the credit will be increased to 30 percent of the cost of qualifying improvements made during the year, and consumers will be able to claim up to $1,200 a year for their improvements, creating an incentive to spread them out over coming years to maximize savings.

Annual tax credit limits will apply for specific improvements, including $150 for a home energy audit; $250 for an exterior door ($500 for all exterior doors); $600 for exterior windows and skylights, central air conditioners; $600 for electric panels; $600 for natural gas, propane or oil water heaters; and $600 for natural gas, propane, or oil furnaces or hot water boilers.

An exception to the $1,200 annual cap will be a $2,000 credit for electric or natural gas heat pumps (heaters and air conditioners) — electric or natural gas heat pump water heaters, and biomass stoves and boilers.

Rebate programs

It’s anyone’s guess as to when rebates funded by the Inflation Reduction Act will be made available to consumers. A $4.3 billion program called High Efficiency Electric Home Rebates is being laid on the shoulders of individual states to figure out how to run, with guidance from the federal government.

It remains to be seen whether homeowners will be able to claim rebates for the same improvements incentivized with federal tax credits or state-funded rebates, Consumer Reports stated in a recent story.

Once up and running, the rebate program will provide up to $14,000 over 10 years for energy-efficiency improvements by households making between 80 percent and 150 percent of their area’s median income.

Available rebates will include up to $8,000 for a heat pump (air conditioner and heater); $1,600 for insulation, air sealing and ventilation; $1,750 for a heat pump water heater; and $840 for an electric range or electric heat pump clothes drier. Older homes will need to upgrade their electrical systems to handle the new equipment, so the program will also offer rebates up to $4,000 for upgrades to a home’s electrical panel and service and $2,500 for wiring.

Households making between 80 percent and 150 percent of their area’s median income will qualify for a rebate of 50 percent of their purchase and installation cost, up to the limits listed above. Households making less than 80 percent of their area’s median income can get up to 100 percent of their project costs.

States will also administer a separate $4.3 billion rebate program, called Home Owner Managing Energy Savings (HOMES) program, that will provide rebates based on the percentage of total energy savings achieved with retrofits.