As part of President Biden’s recently passed Inflation Reduction Act, homeowners have a great opportunity to make energy-efficient upgrades to their home while saving money in the process.
It’s estimated that residential homes consume 21% of U.S. energy consumption, with poor insulation, leaky windows, and inefficient heating and cooling systems contributing to excess energy use and waste.
The Inflation Reduction Act aims to stem this waste, in the process lowering demand on electrical grids and ultimately reducing carbon emissions, by providing homeowners with financial incentives to make energy-saving upgrades.
Here’s what you should know about the new programs and how much you could potentially save.
What Home Improvements Are Covered?
Whether you’ve been contemplating a full remodel or just a few upgrades to your current home, it’s likely you’ll have the opportunity to make some energy-efficient improvements covered under the new programs.
Solar Panels – The installation of rooftop solar panels has been a popular upgrade among homeowners in recent years, especially in sunny states such as Hawaii, California, and Nevada. But making the switch to solar comes at a high price, with upfront installation ranging between $15,000 to $25,000.
The Residential Clean Energy Credit provides homeowners who install solar panels 30% of the installation cost back in the form of a tax credit, meaning a $15,000 installation would result in a $4,500 reduction in Federal taxes owed when it comes time to file. The credit applies to systems installed after December 31, 2021 and remains in effect through 2032.
Energy-Efficient Windows and Doors – Beginning in January 2023, the installation of new exterior doors and windows also comes with a 30% tax credit. The maximum allowable credit per year for windows and skylights is $600, $250 for a single door, and $500 towards exterior doors in a single year.
While these amounts are relatively small, the credits can be claimed in multiple years if the upgrades are done in a staged approach.
Heat Pumps and Heat Pump Water Heaters – Also starting in January 2023, the installation of a heat pump or heat pump water heater can result in both a tax credit and a rebate.
The tax credit is available to all taxpayers, regardless of income, up to 30% of the cost, with a maximum credit of $2,000. Rebates of up to $1,750 towards a heat pump water heater and $8,000 towards a heat pump are also available.
The catch, however, is that rebates are only available for taxpayers making no more than 150% of the “area median income” as determined by the Department of Housing and Urban Development. This online tool can help you determine income in your local area and whether you qualify.
Insulation, Ventilation, and Air Sealing – While not the most exciting of home improvements, the EPA estimates that the average homeowner can save 15% on heating and cooling costs by air sealing their homes and installing better insulation.
Rebates of up to $1,600 for these types of improvements will be available in the new year, with “area median income” limitations also applying.
Electric Appliance Upgrade Rebates – Whether your old appliance kicks the bucket or you’re just ready for an energy-efficient upgrade, the purchase of a new electric appliance may also result in a rebate.
The purchase of an electric stove, range, oven, or clothes dryer is eligible for a rebate of $840, and up to $1,750 towards an electric water heater.
Though income limits once again apply, these rebates are intended to be given immediately at the point of purchase, meaning that retailers like Home Depot or Lowes will be processing the rebates with guidance from the state.
Tax Credits for Electric Vehicles – While not home related, the Inflation Reduction Act adds a new credit for the purchase of a used electric vehicle up to 30% of the vehicle’s price, up to $4,000, starting in 2023.
This credit can also be combined with the Clean Vehicle Credit of up to $7,500 on the purchase of a new all-electric or hybrid plug-in vehicle, which has been extended to 2032.
Qualifying for the credits depends on income and certain criteria the new or used vehicles must meet:
|New Electric Vehicle||Used Electric Vehicle|
|Single tax filers with a modified adjusted gross income under $150,000||Single tax filers with a modified adjusted gross income under $75,000|
|Married couples filing jointly with income under $300,000||Married couples filing jointly with income under $150,000|
|Individuals who file as head of household with income under $225,000||Individuals who file as head of household with income under $112,500|
What Vehicles Qualify?
|Sedans under $55,000||
Vehicles that are at least two years old and under $25,000
|SUVs, trucks, and vans under $80,000|
How Do I Get Started?
If these credits and rebates are just the incentive you need to get started on some home improvement projects, the first step is prioritizing which projects you’d like to get done and the timeframe.
Because many of these credits can be taken over multiple years, you may want to maximize your tax savings by spacing your projects out over several years. Replace windows in one year and doors the next.
Since many credits and rebates have maximum income thresholds, it makes sense to get an idea of what you might qualify for. This handy calculator allows you to see which incentives you qualify for based on the type of upgrades and your income.
Though most incentives start January 1, 2023, each state will determine how the rebate programs are operated. For Oregon residents, sites like the Energy Trust of Oregon and the Oregon Department of Energy’s incentive page will provide the latest information.
We’re Here to Help
Before embarking on any large or costly home improvement, even with the potential to receive some money back, we always encourage a thorough discussion with our clients beforehand to see how these projects will impact their financial plan.
If you have questions about how energy-efficient upgrades might benefit you, or are ready to put a plan for your future in place, reach out… we’re here to help.
Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S.