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Energy Tax Credits

Energy Tax Credits

The Inflation Reduction Act made big changes to energy tax credits. You’re asking yourself, “how does that help me?” If you’re planning on purchasing an EV (electric vehicle), installing new solar panels, or making other energy efficient upgrades to your home, you save big time. In this article, I’m going to break down what’s changed, what you need to know, and how to pay less to Uncle Sam!

What is a tax credit?

You’ve probably heard of tax credits, and believe that they’re better than deductions, but often ask yourself, “What is a Tax Credit?”

Tax credits reduce the taxes you owe, dollar-for-dollar. Whereas a deduction will lower your income that you have to pay tax on. This sounds like the same thing, but it’s not.

Here’s an illustration:

Let’s say you make $50,000 and are in a 20% tax bracket. This means you owe the IRS $10,000 in tax (20% x $50,000). If you are entitled to a tax credit of $3,000, you will now owe the IRS only $7,000 ($10,000 minus $3,000). If you had a $3,000 deduction instead of a tax credit, your net income would now be $47,000 ($50K – $47K), and the tax you owe is now $9,400 (20% x $47,000).

You want to see a more detailed illustration, check out our article on Child Tax Credits. There we have a more detailed example that you can walk through.

What’s changed?

The Inflation Reduction Act updated almost everything regarding energy tax credits. I am going to go over the most important changes:

  • Solar Panel Tax Credits
  • Home Improvements – energy efficient windows, doors, and insulation
  • Installing a home electric vehicle charger
  • Purchasing a new or used electric vehicle

In this article I’m going over the first three. Since the changes to Electric Vehicles (EVs) is so comprehensive, I’ve saved that for its own article here.

Solar Panel Tax Credits

The solar panel tax credit, also known as the Residential Clean Energy Credit, has been available since the late 1970s. It has been modified many times since then, but here are some of the changes recently made:

Solar Panel Tax CreditRules
Amount of Credit30% of cost
Cap on creditNo lifetime caps
Type of CreditNon-Refundable, but can be carried forward
Type of propertyPrimary or secondary homes (not allowed for rentals / investment properties)

Here’s an illustration: Peter installed solar panels in his home. The total cost of installation, wiring, panels, etc. is $25,000. Peter’s tax credit is $7,500 ($25K x 30%.)

Not only are your solar panels eligible under this tax credit, so are the following:

  • Solar panels
  • Solar water heaters
  • Geothermal heat pumps
  • Small residential wind turbines
  • Residential fuel cells
  • Storage batteries

Keep in mind: Some states have different rules regarding state tax credits, check with your CPA in your state to see if your state tax credit is different.

Energy Efficient Windows, Doors, and Insulation

Now referred to as the Energy Efficient Home Improvement Credit. If you improve your home, you get better tax write-offs. Here are the changes:

  • Removed the lifetime ban of $500
  • Now it’s a $1,200 annual credit
  • It’s 30% of what you spent to make the improvement or property you have purchased

These improvements include installing new exterior windows, skylights, doors (interior or exterior), and installing new insulation. Windows, skylights, and doors must meet Energy Star requirements. Insulation must meet the International Energy Conservation Code.

What Costs Qualify for Energy Tax Credits?

Any costs (including labor) for installing anything new that helps heat and / or cool the air inside your home (a.k.a. Air Conditioner / HVAC tax credit.) Must also be for your primary or secondary home. These include:

  • Heat pumps
  • Water heathers
  • HVACs
  • Furnaces
  • Water boilers

Residential Energy Property Caps

The government decided that there needs to be a cap on the amount of tax credit you get for improvements. Here are the annual caps per improvment:

Type of PropertyAnnual Cap
Exterior doors$500

Remember, the total cap is now $1,200 annually. So, if you’re going to spend a lot of money upgrading your home with new energy efficient improvements, you may want to split them between multiple years, so you can maximize your savings.

EV Home Charging Station

The Inflation Reduction Act also extended the tax credit for installing an EV charger in your home. There is still a $1,000 cap, and it’s non-refundable. However, the big change is that the credit is now only available for people in low-income or rural areas.

Low-income as defined by the IRS is an area that has a poverty rate of at least 20% or more (according to US Census.)

Rural areas are non-urban areas as defined by the US Commerce Department.

These new EV Home Charging Station rules take effect in 2023.

Commercial EV Charging Stations

For commercial use, the tax credit is 6%, with a maximum tax credit of $100,000. Additionally, the equipment must be placed in a low-income community. Low-income means the poverty rate is at least 20%.

Electric Vehicle Tax Credits

Did we cover everything in the Inflation Reduction Act, of course not, but we covered the most common tax savings. Now it’s time to move on to our next article on to how you save when purchasing an Electric Vehicle.