The federal government aims to combat climate change by building a clean energy economy. The government rolled out Inflation Reduction Act Efficiency Tax Credits to facilitate the adoption of energy-efficient measures amongst millions of US citizens.
The Biden-Harris Administration enacted the Inflation Reduction Act on August 16th, 2022, indicating the most significant congressional action toward climate change and clean energy.
The Inflation Reduction Act Tax Credits aim to reduce inflation and promote sustainability. They do so by incentivizing the adoption of energy-efficient technologies and practices and offering tax credits to those who comply. As a US citizen, you can reduce your projects’ costs by shifting to energy-efficient technologies, as the Act stipulates.
In this complete guide to the Inflation Reduction Act Efficiency Tax Credits, I’ll explain all the efficiency tax credits you can get for each specific energy-efficient item you own.
I’ll also discuss the energy-efficient measures eligible for tax credits and how to claim the credits for maximum benefits.
Keep reading to learn how to take advantage of these efficiency tax credits and save some bucks.
As a disclaimer to this article also: the laws, IRS rules, tax stipulations, and other measures can change at any time. This is the best information we had to compile everything as efficiently as possible at the time of this writing.
How the Inflation Reduction Tax Credit Will Save Households Money
Before proceeding to energy-efficient measures eligible for efficiency tax credits, let’s explore how this initiative will save you money.
The Inflation Reduction Act Efficiency Tax Credits aims to encourage US households to make energy-efficient home improvements.
By making these improvements, you benefit in the following ways:
● Lowering your energy bills
● Reducing your household’s overall demand for energy
● Saving money by reducing your tax liability
The efficiency tax credits apply to purchasing and installing qualifying energy-efficient products such as HVAC systems, electric cars, Energy Star windows, and insulation.
These tax credits are available for commercial and residential properties. Therefore, you can leverage them to reduce your business’s and residential property’s energy consumption to benefit from both sides.
The Inflation Reduction Act Efficiency Tax Credits are a win-win for the environment and household.
According to the United Nations, generating electricity emits immense greenhouse gasses like carbon and nitrous oxides. These gasses contribute significantly to climate change.
Therefore, using energy-efficient home technologies reduce energy consumption and demand.
Consequently, you play a role in reducing greenhouse gas emissions due to power generation, slowing the rate of climate change.
The tax credits also stimulate the economy by supporting the growth of energy-efficient businesses and technologies.
Since you claim these efficiency tax credits on tax returns, you’re expected to keep all the relevant documents safe. Such documents you’ll need include:
● Installation receipts
● Energy audit reports
● Product labels
● Manufacturer’s certificates
It’s also important to note that you can transfer the tax credits or use them over the lifetime of the eligible measures.
For instance, if your electricity bills are lower following an upgrade, you can claim the efficiency tax credit for the year you performed the upgrade and carry over the remainder in tax liability to the following year.
Now that you know how this initiative will save money, let’s discuss the energy-efficient measures eligible for efficiency tax credits.
Renewable Energy Systems for Homes
Renewable energy sources help generate clean energy free of greenhouse gases. These energy sources also eliminate air pollution caused by generating energy from fossil fuels.
You may qualify for the Residential Clean Energy Tax Credit by installing renewable energy systems in your home.
A point worth noting is that not all homes are suitable for renewable energy systems–environmental conditions determine the suitability.
For instance, you’ll need sufficient sunlight to install and use solar panels.
Renewable energy systems that qualify for tax credits under the Inflation Reduction Act include the following:
● Home solar system
● Qualified battery storage
● Home solar water heating
● Fuel cells
● Geothermal heat pumps
● Small wind energy
Residential clean energy tax credits vary by the year the system was placed in service. As a rule of thumb, you must have put the renewable energy system in service between January 1, 2006, and December 31st, 2034.
The following tax credit conditions apply for solar electric, solar water heaters, fuel cells, small wind energy, and geothermal heat pumps:
● 30 percent for systems put in service by the end of 2019
● 26 percent for systems put in service between 2020 and the end of 2021
● 30 percent for systems put in service between 2022 and 2032
● 26 percent for systems put in service in 2033
● 22 percent for systems put in service in 2034
To qualify, the system must be in service between January 2006 and December 31, 2034.
In addition to the above, the solar water heater must heat at least half of the household’s water.
Moreover, it must be certified by the Solar Rating & Certification Corporation (SRCC) or any licensed entity in your state of residence.
There is a maximum tax credit of $500 for fuel cells for every half kilowatt.
Moreover, the cell must have electricity-only generation efficiency exceeding 30 percent with a nameplate of at least 0.5 kW by an electrochemical process.
If you buy a standalone battery storage system, you qualify for a zero-percent tax credit if you placed it in service before 2023.
However, you qualify for the same tax credits listed above if you placed the battery storage system in service between 2023 and 2034 and if it has a capacity of at least 3-kilowatt hours.
Check out this article for the different incentives and rebates for hybrid water heaters.
The Included Expenses
The government knows that buying a renewable energy system comes with other expenses before the system becomes fully functional.
Therefore, a suitable way to encourage citizens to purchase these systems is by including some of the costs in the tax credits.
You get the sum of purchasing the system and the included expenses when filing for the credit.
The included expenses are:
● Solar PV cells for use with a home solar system
● Labor costs incorporating assembly, onsite preparation, installation, permitting fees, developer fees, and inspection costs
● Balance-of-system equipment like inverters, mounting equipment, and wiring
● Energy storage devices with a capacity of at least 3 kilowatt-hours installed starting January 2023
Although small wind turbines qualify for tax credits, are they worth your money? Check out this article for the verdict.
How to Calculate Your Residential Clean Energy Tax Credit
As I already mentioned, the Residential Clean Energy Tax Credit is awarded uniformly for all the qualifying products. Thus, the calculation method cuts across all the qualifying systems.
It’s also worth mentioning that the credits account for ongoing all-in costs (the cost of buying, permits, labor, certification fees, and other included expenses).
With this knowledge, let’s now look at how you can calculate your residential clean energy tax credits.
The general equation for this calculation is:
Residential Clean Energy Tax Credit = Gross cost of the renewable energy system ✕ 0.30.
Suppose you bought and installed a home solar system in January 2023 at a gross cost of $45,000. What is your tax credit value?
($45,000 x 0.30) = $13,500 Tax Credit
You’ll receive a $13,500 reduction on the amount of tax that you owe. The good thing; you can roll over the remainder to the next tax year.
However, you must file the taxes in the same tax year to qualify for the credit.
How to Claim Residential Clean Energy Tax Credits
Now that you qualify for and know how to calculate the Residential Clean Energy Tax Credit, the next step is to claim it. Here’s how.
Claiming this tax credit involves filing IRS Form 5695. You must file this form for the tax year your system became operational.
For instance, let’s say your geothermal heat pump passed a city inspection on September 10, 2023. You’ll claim your tax credit in early 2024 when you file your 2023 taxes.
You’ll need the following during the filing process:
● The standard federal income tax form or Form 1040
● Residential Energy Tax Credit form (Form 5695)
● Residential Energy Efficient Property Credit Limit Worksheet (Form 5695 instructions)
Once you have the above, let me walk you through the filing procedure below.
Disclaimer: This scenario is for demonstration purposes only. Please consult a licensed tax professional with any questions you might have.
Step 1: File Your Normal Taxes
File your usual taxes on Schedule 3 (Form 1040). These include things like:
● Tallying your income
● Claiming dependents
● Deducting charitable donations
The following screenshot shows that Residential Energy Credits are at Number 5. When you reach this point, it’s time to shift to Form 5695.
Alt: Schedule 3 (Form 1040)
Step 2: Fill Out Form 5695
For this demonstration, we shall use our above example of installing a home solar system at a gross cost of $45,000 (You’re supposed to input the amount for your project).
Here is how we fill Form 5695 with this information:
Alt: Filling Form 5695
We skip lines 2 through 5 because you only installed the home solar system. To get your tax credit, multiply the gross cost of your solar installation project by 0.30 in line 6 (b); in our case, it’s $13,500.
Take the tax credit value calculated above to line 13 of Form 5695. Then, use Form 5695 instructions to calculate your tax liability and enter it in line 14. This is where it gets interesting:
● If your tax liability (line 14) exceeds your tax credit value (line 13), you’ll use the full tax credit in one year.
● If your tax liability (line 14) is less than your tax credit value (line 13), you’ll not use the full tax credit in your one. Instead, you’ll have to carry it over to next year.
Fill in line 15 with whichever is smaller between lines 13 and 14. Here is how our Form 5695 now looks like:
Alt: Filling Form 5695
Assuming your line 13 is less than line 14, you’ll use the entire credit in one tax year. Thus, we shall enter $13,500 as the federal solar tax credit amount in line 5 of Schedule 3 (Form 1040).
Step 3: Fill Out Schedule 3 and Form 1040
In Step 2, we calculated a $13,500 federal solar tax credit for purchasing a $45,000 home solar system. This is the amount we are supposed to enter in line 5 of Schedule 3 (Form 1040), as shown below. This is also the point where you claim nonrefundable credits.
Alt: Filling Schedule 3 (Form 1040)
Enter the total amount per your tax obligations in line 8 of Schedule 3. Note this total amount and enter it in line 20 of Form 1040, as shown below:
Alt: Filling Form 1040
Filling in the tax credit on Form 1040 marks the end of the process. This will reduce the total tax you owe for that particular tax year.
What Happens If Your Tax Liability Is Less Than Your Tax Credit?
This is always a confusing scenario that leaves many people needing help knowing what to do. Therefore, I will use our scenario above to demonstrate how to approach this situation.
We calculated a $13,500 federal solar tax credit from our example above. Therefore, assuming your tax liability after calculation was $9,500, you’re less in tax liability than your solar tax credit.
The federal solar tax credit is nonrefundable and is only used to lower tax liability. In this case, the tax liability is less than the credit.
Thus, you’ll be able to claim $9,500 of tax credit in the first year, and the remaining $4,000 will carry over to the following year.
New Clean Vehicle (Electric-Vehicle) Credits
Electric vehicles (EVs) are the most energy-efficient options on the market.
The average fuel cost of these vehicles is between $800 and $1,000 less than their gas-powered counterparts. That’s why they qualify for energy-efficient tax credits.
The federal government decided to rebrand and expand the new qualified plug-in electric drive motor vehicle (NQPEDMV) credit to incentivize EV adoption.
The credit favors not only the adoption of these vehicles but also their production to create more well-paying jobs in the country.
The Clean Vehicle Tax Credit is worth up to $7,500 for new EVs, hybrid plug-ins, and fuel cell vehicles (FCV) purchases. The incentive extends from January 2023 through 2032.
A point worth noting is that the credit applies only to EVs with final assembly done in North America.
You may be wondering why the government imposed this requirement. Well, it’s an initiative to create more jobs for millions of American citizens while fostering green energy adoption.
Who Qualifies for the Clean Vehicle Credits?
You only qualify for the Clean Vehicle Tax Credits if you meet the following conditions:
● You’re buying the vehicle for personal use and not for resale
● You want to use the vehicle primarily in the United States
Besides the above conditions, the government considers your modified adjusted gross income (MAGI). MAGI incorporates your adjusted gross income (AGI) plus the following if any:
● Untaxed foreign income
● Tax-exempt interest
● Non-taxable social security benefits
With that in mind, to qualify for the clean vehicle credits, your MAGI should not exceed the following:
● $300,000 for couples if you decide to file jointly
● $225,000 for household heads
● $150,000 for other interested parties
Timing is crucial since you want your MAGI below the above thresholds. Thus, you can use the MAGI of the year you take the vehicle’s delivery or a year before–go with whichever is less for your situation.
It’s also worth mentioning that the credit is nonrefundable. Therefore, you won’t get back more on credit than you owe in taxes.
Moreover, it’s impossible to apply excess credits for future taxes.
Conditions for Qualifying Vehicles
Now that you know EVs and FCVs qualify for the energy-efficiency tax credits, it doesn’t mean that all vehicles in these categories are eligible.
According to the IRS, qualifying vehicles must meet specific battery and weight capacities.
Furthermore, they must be manufactured or assembled by select manufacturers.
The table below lists the conditions required for vehicles to qualify for efficiency tax credits:
|At least 7 kilowatt hours
|Gross weight rating
|Less than 14,000 pounds
|Final assembly in North America
|Less than $80,000 for vans, pickup trucks, and sport utility vehicles less than $55 for other vehicles
Table 1: Conditions for clean vehicle tax credits
As you can see from the table, only the manufacturer-suggested retail price (MSRP) is considered.
MSRP entails the vehicle’s retail price as suggested by the manufacturer. The cost covers accessories, trims, and options but not the destination fee.
The vehicle’s battery capacity, weight, vehicle identification number (VIN), and final assembly point are always listed on the window.
Alternatively, you can visit the Department of Energy’s Website to check the vehicle’s final assembly point.
You must fill out Form 8396 to claim the New Clean Vehicle Credit. After filling out the form, file it with your tax return for the year you bought the vehicle.
Used (Previously-Owned) Clean Vehicle Credits
Although new and used clean vehicles qualify for energy-efficiency tax credits, they have different qualifying conditions.
The following criteria apply to previously-owned clean vehicles.
The previously owned clean vehicle credit applies to all qualified EVs and FCVs bought beginning January 2023. The credit is nonrefundable and ranges from 30 percent of the vehicle’s purchase price to $4,000.
The vehicle’s purchase price is a maximum of $25,000 from a licensed dealer.
It’s important to note that vehicles bought before 2023 don’t qualify for this credit.
Used clean vehicles only qualify for this credit if they meet the following conditions:
● Have a sale price of at most $25,000
● The model year is at least two years before your purchase year. For instance, if you’re buying a vehicle in 2023, its model year should be 2021 or older.
● Gross vehicle weight of fewer than 14,000 pounds
● Battery capacity should not be lower than 7 kilowatt hours
● You use the vehicle primarily in the US
You’ll be required to have the following details when filing for the credit:
● The dealer’s name
● The dealer’s taxpayer ID number
● Your name and taxpayer ID number
● Sale date
● Sale price
● Battery capacity
You must fill out Form 8396 to claim the used clean vehicle credit. After filling out the form, file it with your tax return for the year you bought the vehicle.
Energy-Efficient Home Improvement Credit
Energy-efficient home improvement credit aims to reduce the energy you use at home.
Household appliances consume a lot of energy, which explains why the government deemed it necessary to incorporate home improvement into efficiency tax credits.
According to the US Energy Information Administration, an average American household uses 11,000 kilowatt-hours of electricity annually.
However, this high energy consumption rate is attributed to traditional home appliances that use a lot of energy.
To put this into perspective, home appliances use 25 percent of a household’s energy.
How do the Inflation Reduction Act Efficiency Tax Credits help you solve this problem and save money on your household energy?
The efficiency tax credits allow you to claim a tax credit of up to 30 percent of the cost (with a cap of $1,200) for energy-efficient home envelope improvements, excluding heat pumps.
Simply put, you can claim up to 30 percent when you file your taxes and either reduce the taxes you owe or get more refunds.
Energy-efficient home envelope improvements include skylights, windows, doors, insulation, and electrical appliances.
The 30 percent credit allowance for home improvement is a percentage of the sum of:
● The amount you incurred to install qualified energy efficiency improvements at your home in the taxable year (scroll down for the qualified energy efficiency improvements).
● The total residential energy property expenditures you incurred in the taxable year. In this case, residential energy property expenditures entail the costs of new qualified energy property you installed or connected to your main home.
● The amount you paid in the taxable year for your home’s energy audits.
If you opt for a single item among the qualified energy properties, you’ll be eligible for tax credits not exceeding $600.
Qualifying Energy Efficiency Home Improvements
Not all energy-efficiency home improvements qualify for these tax credits, only the ones enlisted by the Internal Revenue Service (IRS). They include the following.
Your home’s insulation is crucial when determining your heating and cooling energy needs.
A well-insulated home uses low energy in heating and cooling since it stays warmer in winter and cooler in summer.
The Inflation Reduction Act allows a 30 percent tax credit for energy efficiency insulation. As already stated, the amount is up to $1,200.
You can file this tax credit for most home insulation products like:
● Can spray foam for air sealing
● House wrap
● Air sealing caulk
● Blow-in fibers
● Rigid boards
● Expanding spray
● Pour-in place
It’s worth noting that air-sealing products like weatherstripping can only qualify if they have a manufacturer’s certification statement.
Heat Pump and Heat Pump Water Heaters: Biomass Stoves and Boilers
Like insulation, you can claim 30 percent tax credits on heat pumps and heat pump water heaters that meet energy efficiency requirements.
A rule of thumb is to install Energy Star-certified heat pumps and heat pump heaters that meet or exceed the highest efficiency tier.
The maximum amount credited for these products is $2,000.
Let me put the heat pump tax credits into perspective below:
According to Forbes, the average cost of a heat pump, including its installation, is $5,500.
A 30-percent tax credit on this amount is $1,650, below the maximum threshold of $2,000. Therefore, to get the full credit, you must owe at least $1,650.
What’s more, you can maximize your tax credits under this category by upgrading to an electric panel that supports your heat pump or heat pump water heater brand.
Since an electric panel falls under a different credit category capped at $1,200 annually, you’re assured up to $600 in tax credits.
Besides the tax credits, heat pumps are more energy efficient than conventional air conditioning and heating systems.
In summer, these pumps pull heat from indoor air and push it out. In winter, they pull air from the outdoors into the house.
According to the Inflation Reduction Act, installing the qualifying heat pumps and heat pump water heaters is a win-win. You reduce your energy consumption and get rewarded with tax credits.
Generally, all ducted heat pumps that are Energy Star-certified are eligible. For mini-split systems, they must be certified and have the following specifications:
● SEER2 > 16
● EER2 > 12
● HSPF2 > 9
Biomass stoves and boilers are also credited the same as heat pumps at the maximum threshold of $2,000.
However, you must check to ensure they have a thermal efficiency rating of at least 75 percent.
For boilers, you can only qualify if your specific brand uses natural gas, propane, or oil.
Home Energy Audits
As a homeowner, you need annual home energy audits to know the amount of energy your home uses.
The audits also help you learn about possible improvements to enhance your home’s energy efficiency. That sounds nice for every homeowner.
The pain point for home energy audits is that they come at a cost. Depending on the level, these audits cost between $100 and $600. That explains why most people hesitate to have them done.
Fortunately, the energy-efficient home improvement tax credit has reduced the pain point by offering a 30 percent tax credit for every energy audit you perform in any given year. The tax credit limit is $150.
To qualify for the tax credit, you must have a professional home energy assessment performed by a certified home energy auditor.
Replacing Doors and Windows
Windows and doors are common sources of energy leaks through drafts,especially in old residences, due to the wear and tear of windows and doors.
The energy-efficient home improvement tax credit includes a 30 percent credit for window replacements.
Although tax credits for home energy efficiency improvements like efficient windows and doors are limited to $1,200, you get a maximum of $600 on windows alone.
Here’s the catch–let’s assume you want to replace more than one exterior window in your home. The total cost of these windows will exceed $600, the maximum for window replacement. How will you approach this situation?
Since the maximum amount for each energy-efficient home improvement tax credit renews yearly, you’ll have to replace the windows over several years.
For instance, if the cost of a window and installation costs $300 and you want to replace four windows, you can do so over two years with the full tax credit of $600.
Like windows, doors have a 30 percent tax credit. However, the limit for each exterior door replacement is $250, and $500 for all exterior doors per annum.
Therefore, if the cost of your exterior doors and replacements exceeds the $500 tax credit threshold, you’ll replace them over several years, as with windows.
The following are the two essential points to note about tax credit eligibility when replacing your exterior doors:
● Air leakage for sliding doors must be less or equal to 0.3 cfm/ft2
● Air leakage for swinging doors must be less or equal to 0.5 cfm/ft2
The table below summarizes the home-improvement efficiency tax credits:
|Energy Efficiency Upgrade
|Annual Tax Credit Limit
|Central air conditioners
|Home energy audits
|Exterior windows and skylights
|$250 for a single door and $500 for all doors
|Heat pump water heaters
|Biomass stoves and boilers
|Heat pump space heaters
|Electrical panels and related equipment
|Oil water heaters, furnaces, propane, and natural gas
Table 2: Home improvement efficiency tax credits
Energy Efficiency and Electrification Rebates
We’re all looking for more ways to save money on our home improvement projects and energy consumption.
Therefore, there’s no harm in discussing energy efficiency rebates established under the Inflation Reduction Act.
The High-Efficiency Electric Homes and Rebates Act (HEEHRA) allocates money to each state for point-of-sale rebates targeting low and moderate-income earners. These rebates are meant for electrification projects among the said group of people.
Although established under the Inflation Reduction Act, tax credits and rebates are different entities with unique eligibility requirements. Therefore, you must know how to approach each entity.
While tax credits reduce the tax you owe to the federal government, rebates are for establishing point-of-sales.
With point-of-sale, you get rebates while purchasing qualifying energy-efficient products.
Therefore, rebates are a form of incentive that discounts the price of the appliance or an upgrade you’re making for your home.
Qualifications for Energy Efficiency Rebates
You can only qualify for HEEHRA energy efficiency rebates if you fall under the low- and moderate-income earners category.
These rebates are for households earning less than 150 percent of their area median income (AMI) in the following categories:
● If you make less than 80 percent of your AMI, you can use the rebates to fully cover the cost of your energy-efficient appliances and any installation needed.
● If you make between 80 and 150 percent of your AMI, you can use the rebates to cover 50 percent of the cost of appliances and installation.
Use this calculator to know if you qualify for energy efficiency tax rebates.
You can receive up to $14,000 if you qualify for HEEHRA rebates. You can use the rebates for the following energy-efficient appliances and home upgrades:
|Maximum Rebate Allocation
|Heat pump water heater
|Heat pump for space heating and cooling
|Electric stove, cooktop, range, oven
|Heat pump clothes dryer
Table 2: HEEHRA rebate amounts for appliances
|Maximum Rebate Allocation
|Upgraded electrical panel
|Insulation, air sealing, and ventilation
Table 3: HEEHRA rebate amounts for home upgrades
Here’s an example of how you can use energy efficiency rebates below.
The Rheem Prestige Condensing Tankless Water Heater is $2,002 on Amazon. Let’s assume installation costs another $248 to make $2,250. You can buy this water heater in one of the following situations:
- If your household’s income is less than 80 percent of the AMI, you can use the entire $1,750 worth of rebates for heat pump water heaters to bring the cost down to $500. Therefore, you only get $500 from your pocket or,
- If your household’s income is between 80 and 150 percent of the AMI, you can cover half the heater’s price using $1,125 worth of rebates and clear the balance out of pocket.
In either situation, you save some bucks while getting an excellent heat pump water heater to save you more money in energy bills.
Combining Efficiency Tax Credits and Rebates
Most people wonder whether it’s possible to combine efficiency tax credits and rebates as this would maximize savings on appliances and home improvement projects.
According to Head of Special Projects Sam Calisch at Rewiring America, you can combine efficiency tax credits and rebates if you qualify for both since they’re tax incentives established by the Inflation Reduction Act.
However, the main challenge is qualifying for the rebates because they’re only meant for low and moderate-income earners.
Therefore, you’re lucky if you fall into these categories, as you can combine the two incentives and increase your savings on appliances and tax refunds.
One drawback is that low and moderate-income earners in America don’t have sufficient tax liability to claim the credits.
Therefore, it’s a challenging scenario. However, it’s better for you if you’re in the right position to claim both.
How to Maximize Your Efficiency Tax Credits
With the ever-rising costs of living, it’s prudent to look for more ways to lower your expenses. One way to do that is by reducing the taxes you owe to the federal government.
In this case, you pay less instead of paying more taxes and save some bucks for use in other activities.
Maximizing your Inflation Reduction Act Efficiency Tax Credits is an excellent way to lower your taxes and save some money.
However, it can be challenging to do this due to the annual aggregate limits imposed on each efficiency tax credit product.
One fact that will help you maximize these credits is that although the tax credits have a certain threshold (apart from the residential clean energy tax credit), they reset annually.
Therefore, you can claim them by spreading your home improvement projects over several years.
Here’s an example. Let’s assume you want to replace your exterior doors and windows. These renovation projects will exceed the $1,200 tax credit threshold for these efficiency upgrades.
Therefore, you can replace the doors in one year and the windows in the next year to use your tax credits.
Inflation Reduction Act Efficiency Tax Credits can help save American household money while promoting clean energy to combat climate change. These tax credits are your go-to option to conduct a home improvement and save money.
The Inflation Reduction Act established by the federal government employs efficiency tax credits as an incentive for energy-efficient home upgrades.
As such, you get a reduction in your taxes for installing renewable energy systems, upgrading to clean EV cars, and making your home energy-efficient.
Besides low taxes, you’ll reduce your household’s energy costs by upgrading your home. Consequently, you’ll have more savings in taxes and household bills.