How To Cash In On Billions In Green Home Improvement Tax Credits And Rebates

On On Aug. 16, President Joe Biden signed the Inflation Reduction Act into law, which will provide some $370 billion in energy and climate spending and tax breaks over the next decade. It is the most aggressive federal action to combat climate change in the country’s history and is designed to help the White House meet its lofty goals to reduce greenhouse gas emissions.

The result is a piñata full of goodies – for energy producers, electric car and battery manufacturers, other companies and ordinary households. “There’s something for everyone,” says Sophie Karp, an energy analyst at KeyBanc Capital Markets.

While the loans for electric vehicle buyers (both new and used) have garnered a lot of attention, their price pales in comparison to the tens of billions of dollars in tax credits and rebates for homeowners who invest in everything from solar panels to heat pumps and new ones windows to electric stoves.

According to Goldman Sachs, the law will be “most transformative” in promoting battery storage for homes, but it also boosts funding for numerous other products that could save individual homes thousands and even tens of thousands of dollars. Most of the provisions will not take effect until next year, although some are already available as expiring credit extensions.

All told, the Congressional Joint Committee on Taxation estimates that the government will spend nearly $37 billion in individual tax credits on green building improvements over the next 10 years. There are also potential savings for consumers once these improvements are made. Households that switch from heating oil or propane to electric heating, for example, are expected to save an average of $493 a year, according to nonprofit organization Rewiring America.

If you’re looking to retrofit your home with carbon-friendly home upgrades, here’s what you need to know to get the most out of the IRA’s regulations.

Solar panels and battery storage: 30% tax credit, unlimited

Leading the provisions of the home improvement bill is an increase and extension of the solar energy installation tax credit, which should fall from 26% to 22% next year before it expires in 2024. Instead, it has now been raised to 30%. and extended to 2032. It is then scheduled to drop to 26% next year before expiring in 2035 unless Congress renews it.

That means homeowners who buy a $30,000 solar system will be eligible for a $9,000 ($1,200 more than previously guaranteed for this year). This is a tax credit — not a tax deduction — so it reduces the federal income tax you owe dollar for dollar, rather than simply lowering your taxable income.

There’s no maximum on how much homeowners can spend, but these credits are non-refundable, meaning you can’t get more back than you can paid in income taxes. However, any portion of this tax credit that cannot be used in the year a system is installed can be carried forward to reduce future tax bills.

The credit is available for both systems that you buy for cash and the ones you buy with financingbut not for systems installed by third-party companies that are still owned – businesses, not homeowners, can apply for credit for these leased systems.

Beginning next year, that unlimited credit will extend to battery storage installation, which costs an average of $16,000 — meaning an average of $4,800 in potential tax savings. If you’re looking to spend on an electrical panel, you can do so with this credit too – but only if it’s upgraded in conjunction with installing a rooftop solar panel. Otherwise, you’ll be hit with a cap (more on that below).

Geothermal heating: 30% tax credit, unlimited

There’s also now an unlimited 30% tax credit for installing geothermal heating, which transfers heat from the ground into your home for space and hot water heating – rather than generating it by burning fossil fuels. A typical system costs about $24,000, resulting in an average savings of $7,200. Like the loan for solar systems, this loan is valid until at least 2032. It is also non-refundable, but can be carried forward.

Heat pumps, doors, windows and more: 30% tax credit, up to $3,200

For homeowners wanting to make less dramatic adjustments, the IRA offers a 30% credit on a range of products including windows, insulation and heat pumps, which are energy-efficient alternatives to stoves and air conditioning. This credit is capped — with amounts varying by item — but it resets every year, meaning homeowners can spread their upgrades to maximize savings. Warning: It won’t be available until next year, so you might want to postpone these improvements until 2023.

Note that there is a $1,200 annual tax credit limit for “weathering” items – including doors, windows, energy audits, and insulation. (That means only $4,000 in weathering improvements each year qualifies for the 30% credit.) If you hit the $2,000 mark on a new heat pump, you get the maximum savings of $3,200.

This credit is non-refundable and unlike those for solar, batteries and heat, cannot be carried over to future years – another possible reason to split your weathering expenses.

Homeowner Who Manages Energy Savings (HOMES) Rebate: Up to $8,000

The IRA also offers two different sets of rebates, which are effectively upfront device rebates weighted to help those on more modest incomes the most. Under the Home Owner Managing Energy Savings (HOMES) rebate, homeowners who install upgrades that reduce energy use by 35% or more are eligible for rebates of up to 50% of the project cost, or $4,000, whichever is the case amount is lower.

But lower-income households — that is, those earning less than 80% of their area’s median income — can get up to a $8,000 rebate, or 80% of a project’s cost, whichever amount is lower.

As the table below shows, energy-efficiency improvements that don’t meet the 35% threshold qualify for smaller dollars – with maximum rebates doubled again for lower-income households.

One big caveat: Unlike the tax credits, which are available to everyone who is eligible, Congress has approved a set amount for the rebate program to be implemented by each state. As such, the timing and exact terms (e.g. how homeowners demonstrate their energy savings) remain unclear – although some experts believe details and discounts could be available as early as next year.

A handy resource for checking the status of rebates and credits in your state – including any special state-funded incentives – is maintained here by North Carolina State University.

In the meantime, here are the limits set by Congress for HOMES discounts:

High Efficiency Electric Home Discount Program: Up to $14,000

Potential savings are even greater under this program, which is limited to homeowners earning up to 150% of their average income from the acreage. (You can look up your region’s median here.) As part of this rebate, a select few items, including electrical panels and wiring, are eligible for potential rebates of up to $14,000. This can also be coupled with the tax credits for additional savings. However, it cannot be combined with the HOMES discount.

Again, timing and specific terms are left up to the states, so stay tuned.

Households earning less than 80% of their median income can claim the full cost of upgrades up to certain amounts set by Congress (see below), while households earning between 80% and 150% can claim either 50% of the upgrade cost or maximum discount, whichever is lower.

Here are a few more caveats: Don’t try to claim a discount on an electric stove if you already have one. That makes you unfit. If you already have an electric tumble dryer, you are also not eligible to claim the heat pump tumble dryer discount.

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