Tax Credits for Homeowners: What You Need To Know

If you’ve been considering making green home improvements, you might be in for some budgetary luck. President Biden signed the Inflation Reduction Act of 2022 into law on Aug. 16, 2022. Among other initiatives, the bill lowers energy costs, reduces carbon emissions, and invests in a clean energy economy. Such investments primarily take the form of financial incentives—including tax credits and rebates—to make “going green” more affordable. 

Key Takeaways

  • President Biden signed the Inflation Reduction Act into law on Aug. 16, 2022. 
  • Consumers might qualify for $10,000 or more in tax breaks and rebates. 
  • The tax incentives help make solar panels, electric vehicles, and energy-efficient appliances more affordable.

What Is the Inflation Reduction Act of 2022?

The Inflation Reduction Act of 2022, H.R. 5376, will “lower health care, prescription drug, and energy costs, invest in energy security, and make our tax code fairer—all while fighting inflation and reducing the deficit,” according to the White House.

The legislation is designed to:

  • Expand Medicare benefits
  • Lower healthcare costs
  • Lower energy bills
  • Reduce carbon emissions by about 40% by 2030
  • Create clean manufacturing jobs
  • Invest in disadvantaged communities
  • Close tax loopholes used by the wealthy

According to the White House, the Inflation Reduction Act is “the single largest investment in climate and energy in American history.”

Tax Credits for Homeowners

One of the key goals of the Inflation Reduction Act is to help businesses boost clean energy production. However, the bill also offers several tax credits and rebates for consumers who invest in cleaner energy sources and energy-efficient home upgrades.

Energy Efficient Home Improvement Credit

The Nonbusiness Energy Property Credit expired at the end of 2021. However, the Inflation Reduction Act revives, enhances, and renames the credit—now the Energy Efficient Home Improvement Credit. The bill also extends the credit to Dec. 31, 2032, with the new rules applying to property placed in service after Dec. 31, 2022 (the old rules apply for the 2022 tax year).  

The credit is equal to 30% of what you spend on:

  • Qualified energy efficiency improvements – These include insulation, energy-efficient windows, and energy-efficient exterior doors. 
  • Residential energy property – These are energy-efficient versions of appliances that heat or cool your home, including heat pumps, central air conditioners, biomass stoves and boilers, and oil furnaces. It also includes energy-efficient water heaters and boilers and electric panel upgrades installed in conjunction with qualified energy property improvements. 
  • Home energy audits – A home energy auditor helps you determine how much energy your home uses, where your home is inefficient, and which improvements you should prioritize to save energy (and money).  

Annual credit caps apply to specific items—such as an aggregate $600 limit for exterior windows and skylights, $2,000 for heat pumps and water heaters, and $150 for home energy audits. 

Residential Clean Energy Credit

The current Residential Energy Efficient Property Credit was set to expire in 2024. However, the Inflation Reduction Act extends it through 2034, rebrands it as the Residential Clean Energy Credit, and boosts the credit amounts to 30% for 2022 to 2032, 26% for 2033, and 22% for 2034.

The credit helps offset the costs of installing qualifying systems using solar, wind, geothermal, biomass, or fuel-cell power to generate electricity, heat water, or regulate home temperatures. The credit also applies to battery storage technology with a capacity of at least three kilowatt-hours starting in 2023. 

HOMES Rebate Program

The HOMES Rebate program rewards homeowners who cut home energy consumption through energy-efficient upgrades, such as insulation and HVAC installations.

You’re eligible for a maximum rebate of $2,000 or half the upgrade cost—whichever is less—if you reduce home energy use by 20%. The rebate jumps to the lesser of $4,000 or half the upgrade cost if you cut energy by at least 35%. The rebates double to $4,000 or $8,000, respectively, if your income is 80% or less of your area’s median income.

High-Efficiency Electric Home Rebates

The High-Efficiency Electric Home Rebate program gives refunds to low- and moderate-income families who buy energy-efficient electric appliances. Qualifying families can get rebates up to a certain amount for:

  • An electric stove, cooktop, range, or oven – $840
  • An electric heat pump clothes dryer – $840
  • Insulation, air sealing, and ventilation – $1,600
  • A heat pump water heater – $1,750
  • Electric wiring – $2,500
  • An electric load service center upgrade – $4,000
  • A heat pump for space heating or cooling – $8,000

The rebates are available to households earning less than 150% of the area’s median income. If your household income falls:

  • Below 80% of the area median income, you can claim rebates for 100% of your upgrades, up to a $14,000 limit.
  • Between 80% and 150% of the area median income, you can claim rebates for 50% of your costs, up to $14,000. 

State energy offices and Indian Tribes carry out the High-Efficiency Electric Home Rebate program.

What Is a Tax Credit?

A tax credit is an amount of money you subtract directly from the taxes you owe. Unlike deductions, which reduce your taxable income, tax credits lower the amount of tax you owe or are added to your refund, should you be due one.

How Much Does a Solar Electrical System Cost?

According to the Center for Sustainable Energy, the average residential solar-powered electrical system costs between $15,000 and $25,000 before tax credits or incentives.

What Is the Tax Credit for Electric Vehicles?

Under the Inflation Reduction Act, you may be eligible for a tax credit of up to $7,500 if you buy a qualified electric vehicle—or $4,000 for a used one—including electric, plug-in hybrid, and hydrogen fuel cell vehicles. Income limits, vehicle price limits, and vehicle qualifications apply.

The Bottom Line

The Inflation Reduction Act extends and expands tax credits and rebates for energy-efficient home improvements, making these upgrades more affordable to individuals and families. Still, the rules for claiming these tax breaks are complicated. Consult with a qualified tax specialist to ensure that you take advantage of the credits and rebates available to you.