Warming Up to Climate Tax Breaks

December 7, 2022

President Biden signed the Inflation Reduction Act of 2022 in August, and now we have details about climate tax breaks in the new law. As always, our discussion is nonpartisan and intended to highlight potential financial benefits to our readers. The act provides a series of credits and rebates to help promote consumer spending and investments in electric vehicles, home-efficiency upgrades, and energy-efficient appliances. It extends or tweaks current credits, or creates new ones. Here’s what we know so far:

How do the credits and rebates work?

Most of the incentives in the Inflation Reduction Act are a tax credit, which means the benefit is received when filing a return and tax is due. The taxpayer does not receive cash back for the credit. If they install solar panels, for example, they’ll be eligible for a “residential clean energy credit” of up to 30%. This credit extends to the installation of other energy efficiencies, such as wind or geothermal equipment. Furthermore, if the taxpayer owes $3,000 in federal income tax in 2023, that’s the most they can receive in credit, even if 30% of their solar project is $10,000.

How much can consumers potentially save? While there are limits to the various credits, in totality, consumers could benefit from roughly $10,000 in tax savings if they implement energy-efficient home improvements as well as buy qualifying electric vehicles.

New electric vehicles

For new electric vehicles (EVs), the act extends the current tax credit of $7,500 to 2032. For 2022 and 2023, buyers can claim the credit when filing their federal tax return. Beginning in 2024, a cash credit can be applied by the dealership at the time of purchase. The current EV program, expiring at the end of 2022, limits credits to vehicles from manufacturers that sell fewer than 200,000 per year—which means vehicles from General Motors, Tesla, and Toyota are ineligible. Beginning in 2023, however, all manufacturers will again be eligible, but with additional layers of restriction:

  • Manufacturing requirements. Final assembly of the new car must occur in North America. In 2023, consumers can receive a $3,750 credit for an EV that was assembled in North America, including its battery components. Another $3,750 credit is available if minerals in the battery were mined in countries that have a free-trade agreement with the United States.
  • Income requirements. Single filers qualify for a tax credit on a new EV purchase if their adjusted gross income is less than $150,000—or $300,000 for married couples filing jointly.
  • Vehicle pricing. To qualify for the credit, the car must not cost more than $50,000 (or $80,000 for an SUV, truck, or van).

Used electric vehicles

For used EVs, the current credit applies in 2022 with no changes. In 2023, however, there’s a $4,000 credit that applies up to 30% of the sale price. Unlike new EVs, there are no made-in-America requirements for used EVs. However, some other restrictions apply:

  • Car year. Car must be at least two years old.
  • First sale. Credit applies only if it’s the first sale, meaning the seller purchased the car new through a dealer.
  • Income requirements. Single filers can qualify if AGI is less than $75,000—or $150,000 for married couples filing jointly.
  • Vehicle pricing. Price must not exceed $25,000.

Home energy improvements

The Inflation Reduction Act includes rebates for home energy improvements: up to $14,000 for appliances, and up to $8,000 for efficiency upgrades in areas such as HVAC and insulation, covering up to 50% of a project. Energy-efficient appliances include induction stoves, clothes dryers, and air conditioners. Since individual states run the rebate programs, timing of the rollout will likely vary. Income restrictions apply, and you’ll probably need to document the cost of an energy improvement with your state in order to receive a rebate. There are various dollar caps based on project, so consumers should check with their local energy utility for specifics.

Homeowners can receive a tax credit for the installation of solar panels or other clean-energy improvements. The credit is up to 30% for solar panels, which is an increase from 25% in 2023 under the previous law. Homeowners can also get up to $2,000 in tax credit for improvements in energy efficiency, such as exterior doors, skylights, exterior windows, and water heaters. Most home-improvement credits apply in the year a project is completed.

Taking advantage of savings in the Inflation Reduction Act of 2022 will probably require patience and planning because there are significant restrictions and limitations to the credits and rebates. Some apply in 2023 only; others in 2024 and beyond. As always, if you face an uncertain situation and need guidance, reach out to one of our advisors for a consultation.

For more details about the climate tax rebates, the Biden Administration has created a website with the most recent information and updates.

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