Can You Harness the Power Of Federal Energy Tax Credits?
- Taxpayers can take advantage of expanded federal energy-efficiency tax credits that seek to reward individuals for making their homes greener and driving electric vehicles.
- The Inflation Reduction Act increased the amounts taxpayers, including high-income earners, can claim as credits for climate-friendly home improvements and modifications.
- The Act also added credits for purchasing electric vehicles and installing home EV charging stations.
- Here, we provide a quick overview of the energy-efficiency credits you might consider.
Thanks to the Inflation Reduction Act (IRA), the federal government now offers expanded tax credits encouraging individuals to make their homes more climate-friendly and to drive electric cars. And, good news: even high-income earners can take advantage of these home-related tax credits.
Greening Home(s)
Until December 31, 2022, the lifetime tax credit for residential home energy-efficiency measures was limited to just $500. But, starting in 2023, you might receive more with two expanded types of energy tax credits:
- An annual Energy Efficient Home Improvement Credit of up to $3,200 allows individuals to claim, for renovations of, or additions to an existing home in the U.S:1
- a. Up to $1,200 each year for 30% of the amount paid on qualifying improvements made during that year for such items as exterior doors and windows, skylights, insulation, and air-sealing materials as well as some heaters and boilers. (Note: Each item has different limits.)
- b. Up to $2,000 each year for 30% of the amount paid on heat pumps and water heaters (electric or natural gas), biomass stoves, and biomass boilers.
- There is no cap on the annual Residential Clean Energy Property Credit you might take for up to 30% of the cost of qualifying expenditures on such items as solar panels, solar water heaters, fuel cells, wind turbines, geothermal heat pumps and battery storage. These can be purchased for an existing or newly constructed home.2
There is no income limitation to claim either of the credits. There also is no lifetime limit for claiming the credits, which are determined annually. Therefore, you might want to consider not only pacing your energy improvements over several years, but also investing in more energy-efficiency measures while these tax credits last.
Be aware, though, that both credits are nonrefundable personal tax credits; that means they cannot exceed your income tax liability when combined with other tax credits. Also, expenditures eligible for these credits must be reduced by any rebates or subsidies offered by public utilities or incentives offered by state agencies.
Other limitations apply: The home must be a principal residence (or a second home for personal use only). A reduced credit is available for mixed-use properties (i.e. personal property that is partially used for business purposes).
(For additional details, see “Know the Home Tax Credits You Might Take.”)
Driving Electric Vehicles
The Inflation Reduction Act also seeks, albeit with less generous tax credits, to provide financial incentives for people purchasing electric vehicles (EVs).
The IRA’s new Clean Vehicle Tax Credit seeks to spur EV acquisitions. The deduction is up to $7,500 for select vehicles. There are stringent eligibility criteria and income restrictions on which taxpayers can receive this credit. To qualify, your modified adjusted gross income (AGI) may not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers.
High-income earners might be able to benefit from a tax credit for setting up an electric vehicle charging station in their home. For individuals, the Alternative Fuel Refueling Property Credit (also known as the “EV charger tax credit”) is for 30% of hardware and installation costs up to a maximum of $1,000. But keep an eye on the calendar: This tax credit is available only for property placed into service before December 31, 2032.
Even though the federal government may not be offering many tax breaks for EVs (at least not yet), you might want to investigate dealer incentives or various state and regional programs that may provide additional benefits for the purchase of electric vehicles and the installation of home charging stations.
Know the Home Energy Tax Credits You Might Take
Energy Efficient Home Improvement Credit
An annual credit of up to $1,200 is available for equipment costs on:
- Exterior doors
30% of the cost up to $250 per door, with $500 as the maximum credit - Exterior windows and skylights
30% of cost, up to — a $600 maximum credit - Insulation materials or systems, and air sealing materials or systems
30% of the cost - Residential energy property
30% of cost, with a $600 maximum credit for each of these items (also may include labor costs):- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces and hot water boilers
- Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property and enable its installation and use
- Home energy audits
30% of the cost, up to a maximum of $150
An annual credit of up to $2,000 is available for:
- Heat pumps and water heaters (electric or natural gas), biomass stoves and biomass boilers
up to 30% of the cost of the equipment; may include labor costs
Residential Clean Energy Property Credit
An annual credit of 30% is available for the cost of equipment and labor costs (no overall dollar limit) for:
- Solar panels
- Solar water heaters
- Fuel cells
- Wind turbines
- Geothermal heat pump and battery storage technology
Consulting Experts
With careful planning, taxpayers can improve their home’s energy efficiency or go green with an electric vehicle while realizing real tax savings. If you are considering any home improvements or the purchase of an electric vehicle, we recommend that you speak with your tax professionals — and we invite you to consult with Bessemer’s Tax Advisory Team.
- The credit is allowed for qualifying property placed in service on or after January 1, 2023, and before January 1, 2033
- These credits apply to property placed into service after December 31, 2021, and before January 1, 2033. This percentage rate phases down to 26% for property placed in service in 2033, 22% for property placed in service in 2034, and no credit is available for property placed in service after December 31, 2034.
This material is for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material is based upon information obtained from various sources that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. The views expressed herein do not constitute legal or tax advice; are current only as of the date indicated; and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. Bessemer Trust or its clients may have investments in the securities discussed herein, and this material does not constitute an investment recommendation by Bessemer Trust or an offering of such securities, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference.
