By: Brian Lips, Sr. Policy Project Manager
The Inflation Reduction Act of 2022 (H.R. 5376) is a sweeping piece of legislation, representing the largest ever investment in renewable energy, energy efficiency, and electric vehicles by the federal government. The bill extended and modified a number of existing tax incentives with new requirements or bonuses to favor or require onshore manufacturing, development within disadvantaged communities, and the use of fair labor practices. Congress also addressed challenges historically faced by non-profits and other tax-exempt entities by making new mechanisms to monetize the tax credits through direct pay or a transfer to an unrelated taxpayer. The bill also established several new incentives and appropriated funding to various federal agencies and state governments to further incentivize renewable energy, energy efficiency, and electric vehicles.
While there are many key provisions in this bill, and DSIRE is being updated to incorporate all those that fit within its scope, this article focuses on the provisions of the bill that target the residential sector. As a result of the Inflation Reduction Act, there are now five tax credits that can benefit a homeowner or a prospective car owner, as detailed below. Additional incentive programs will also be made available through state energy offices using targeted appropriations from the bill.
Electric Vehicles
In its current form, the Plug-In Electric Drive Vehicle Tax Credit awards a tax credit of up to $7,500 to taxpayers who purchase a new electric vehicle. The credit is designed to decrease over time for each manufacturer as they produce more electric vehicles. The Inflation Reduction Act extended the tax credit through December 31, 2032, but adopted new rules that fundamentally change the tax credit and the vehicles that will qualify for it. Beginning on January 1, 2023, electric vehicles will only qualify for a tax credit if the final assembly occurs in North America and certain components meet the sourcing requirements established by the bill.
Vehicles purchased in 2023 will qualify for a tax credit of $3,750 if 40% of the critical minerals used in their batteries are extracted and processed in the U.S. or another nation with which the U.S. has a free trade agreement, or the batteries are recycled in North America. These percentages increase over time. Vehicles can qualify for an additional $3,750 tax credit if an increasing percentage of battery components are manufactured and assembled in North America. The bill also caps the purchase price of vehicles and adjusted gross income of taxpayers to be eligible for the credit, and establishes a mechanism for the credit to be transferred to the vehicle dealer in exchange for a point of sale discount to the buyer.
The Previously-Owned Clean Vehicle Tax Credit is a new tax credit adopted by the Inflation Reduction Act for used electric vehicles purchased by a qualifying taxpayer after December 31, 2022. The credit is worth the lesser of $4,000 or 30% of the sale price. The model year of the vehicle must be at least two years earlier than the calendar year in which the taxpayer acquires it, and the vehicle must have a gross vehicle weight of less than 14,000 pounds. The transaction must take place through a dealer and carry a sale price of $25,000 or less, and be the first transfer since the establishment of this tax credit. The credit is not available for taxpayers with a modified adjusted gross income exceeding: $150,000 for a joint filing, $112,500 for a head of household, or $75,000 for a single filing. As with other tax incentives, the Inflation Reduction Act established a mechanism for a taxpayer to transfer this credit to the dealer in exchange for a point of sale discount.
The Alternative Fuel Vehicle Refueling Property Tax Credit provides a tax credit for the purchase of residential and commercial electric vehicle chargers, but it expired at the end of 2021. The Inflation Reduction Act reinstated the credit for purchases made in 2022 and extended the expiration date to December 31, 2032. Residential chargers can qualify for a tax credit of 30% of the cost up to $1,000. Equipment purchased for a non-residential purpose must meet certain labor requirements to qualify for the full 30% tax credit, but residential chargers do not.
Renewable Energy and Energy Efficiency
The Residential Energy Efficiency Tax Credit was created by the Energy Policy Act of 2005, and provides a tax credit for certain energy efficient purchases by homeowners. While the credit previously had a lifetime cap of $500 and periodically expired altogether, the Inflation Reduction Act extended it through December 31, 2032 and increased its value for purchases made after December 31, 2022. The lifetime cap for the credit was removed in favor of caps on the amount of tax credit for each individual purchase or improvement, and an annual cap of $1,200 with some exceptions. Natural gas or electric heat pumps and natural gas or electric heat pump water heaters can qualify for a 30% tax credit up to $2,000. Other qualifying water heaters and HVAC equipment can qualify for a tax credit of 30% up to $1,200. Building envelope improvements, including windows, skylights, doors, insulation, and air sealing can also qualify for tax credits.
The Residential Renewable Energy Tax Credit was also created by the Energy Policy Act of 2005, and provides a tax credit for renewable energy equipment purchased by homeowners. Previous legislation had established a phaseout of the credit, decreasing to 22% in 2023 and expiring completely in 2024. The Inflation Reduction Act delayed the phaseout of the credit and extended the expiration date. Eligible equipment placed in service by December 31, 2032 can receive a tax credit of 30%. The tax credit is scheduled to decrease in 2033 and 2034, and then expire altogether in 2035. The Inflation Reduction Act also made standalone energy storage systems eligible for this tax credit for the first time.
Residential Tax Credits Available in 2023
|
Equipment Type |
Incentive |
Maximum Incentive |
|
New Electric Vehicles |
$7,500 |
$7,500 |
|
Used Electric Vehicles |
30% |
$4,000 |
|
EV Chargers |
30% |
$1,000 |
|
Windows and Skylights* |
30% |
$600 per year |
|
Exterior Doors* |
30% |
$250 per door, $500 per year for all doors |
|
Insulation* |
30% |
$600 per year |
|
Air Sealing* |
30% |
$600 per year |
|
Natural Gas or Electric Heat Pumps |
30% |
$2,000 |
|
Natural Gas or Electric Heat Pump Water Heaters |
30% |
$2,000 |
|
Central Air Conditioners* |
30% |
$1,200 |
|
Gas, Propane, or Oil Water Heaters* |
30% |
$1,200 |
|
Gas, Propane, or Oil Water Boilers* |
30% |
$1,200 |
|
Biomass Stoves |
30% |
$,2000 |
|
Panelboards, Sub-panels, Branch Circuits associated with an above efficiency improvement* |
30% |
$1,200 |
|
Solar PV Systems |
30% |
N/A |
|
Solar Water Heaters |
30% |
N/A |
|
Fuel Cells |
30% |
N/A |
|
Small Wind Systems |
30% |
N/A |
|
Geothermal Heat Pumps |
30% |
N/A |
|
Stand-Alone Battery Storage Systems |
30% |
N/A |
* Tax credits for these items are subject to a collective annual cap of $1,200 per taxpayer
Future Incentives
The Inflation Reduction Act also appropriated money to establish rebate programs at the state-level for residential energy efficiency improvements. The bill distributes $4.3 billion to state energy offices through 2031 to implement Home Energy Performance-Based Whole-House Rebate (HOMES) programs. The state energy offices will determine the final design of these programs, but the Inflation Reduction Act provides the broad parameters and sets the maximum incentive levels. The programs will target individuals and aggregators carrying out energy efficiency upgrades of single-family or multi-family homes with incentives based on the modeled energy savings of the retrofits. Retrofits to single-family homes that achieve modeled energy savings of 35% or more can receive a maximum rebate of $4,000 or 50% of the project costs, whichever is less. Retrofits to multi-family homes that achieve modeled energy savings of 35% or more can receive a maximum rebate of $4,000 per dwelling unit, with a maximum of $400,000 per building. Larger incentives will be available for qualifying low- or moderate-income houses.
The Inflation Reduction Act also appropriated $4.5 billion to state energy offices and tribal governments to implement prescriptive energy efficiency rebate programs through the High-Efficiency Electric Home Rebate Program. As with the HOMES program, the Inflation Reduction Act establishes the general guidelines for the program and the maximum incentives that the resulting programs can provide. The bill also includes a list of the appliance types and non-appliance upgrades eligible for incentives through the program, including heat pumps, heat pump water heaters, electric stoves, cooktop ranges, electric heat pump clothes dryers, insulation, air sealing, ventilation, and electric wiring. The bill also requires state energy offices to make these incentives available as point-of-sale rebates.
State energy offices will need to submit their plans for these rebate programs and have them approved by the Department of Energy before they can implement them. It is unclear how quickly these programs will be made available, but they will be separately listed by state in DSIRE as soon as they are approved.