3 New Tax Credits Can Help You Save Money and the Planet
The Inflation Reduction Act extended and amended several tax credits that can help you save money on clean vehicles and home improvements.
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The Inflation Reduction Act was signed into law in August 2022, and with it comes a slew of new and revised tax credits. Many of these can help people who want to decrease their carbon footprint also save money.
As with many large tax-related changes, some of the details get ironed out after the law passes. Many of the major changes also won't start until (at least) the 2023 tax year. However, here's an overview of new or revised tax credits that you'll want to consider as you plan your future purchases.
Clean Vehicle Tax Credits
Starting in 2023, purchasing an electric, plug-in hybrid or hydrogen fuel cell vehicle could result in a tax credit worth up to $7,500 for a new vehicle or $4,000 for a used vehicle. (There's also a tax credit if you sign a binding sales contract before the end of 2022, but different rules apply.)
To qualify, you need to be below the income limits, which range from a modified adjusted gross income of $75,000 for single filers to $150,000 for joint filers who buy a used vehicle — and double that when buying a new vehicle.
New vehicles also have to meet certain requirements to be eligible:
- The manufacturer's suggested retail price has to be under $80,000 for vans, SUVs and pickups, and under $55,000 for other vehicles.
- The final assembly of the vehicle has to be in the U.S.
- The vehicle has to have a battery with a capacity of at least seven kilowatt hours.
- Starting in 2024 and 2025, there are also requirements related to where the battery's components and critical minerals come from.
Used vehicles must be at least two years old and sold by a dealer for less than $25,000. It also has to be the first time the vehicle was resold.
All the vehicle-related requirements can be tricky to navigate. You can look for lists of eligible vehicles when you're in the market for a new (or new-to-you) vehicle to see which will qualify.
Keep in mind, the tax credit is nonrefundable, and you can't roll over any unused proportions of the credit. Although, beginning in 2024, you can let the dealer claim the credit and give you a discount on the purchase price instead.
Energy Efficient Home Improvement Tax Credit
The energy efficient home improvement tax credit modifies and extends the nonbusiness energy property credit through 2032. The new rules begin in 2023, and you can claim up to $600 in tax credits (a $2,000 purchase leads to a $600 tax credit) for most purchases. These include:
- A home energy audit ($150 limit)
- Exterior doors ($250 per door, up to $500 total)
- Exterior windows and skylights
- Insulation and air sealing
- Electric panel upgrades
- Heat pump, heat pump water heater and biomass stoves ($2,000 limit)
- HVAC systems
- Biomass stoves and boilers
There is generally a $1,200 annual limit, except if you claim the credit for an eligible heat pump, heat pump water heater or biomass stove. The credit is nonrefundable and can't be rolled over.
Many of these improvements can lower your energy bill and save you money. For example, installing Energy Star certified windows reduces energy bills by 12% on average. You can use the Energy Star Home Upgrade guide to see how different upgrades can impact your costs, and the Energy Star rebate finder to potentially find additional savings on eligible products.
Residential Renewable Energy Tax Credits
The bill also modified and extended a clean energy tax credit for buying and installing renewable energy systems for your home. Eligible systems can include:
- Solar electric and water-heating systems
- Fuel cell (up to $500 per half kilowatt)
- Small wind energy
- Geothermal heat pumps
- Standalone batteries that have at least a three kilowatt hour capacity.
The eligible expenses can include the cost of the equipment, labor, fees, and sales taxes. However, there may be specific requirements depending on the equipment. For example, you must purchase brand new solar equipment and you have to own the system outright — you can't lease it — to qualify.
You don't have to meet any income limits, and there's no cap on how much you can receive from the tax credit. Additionally, although the tax credit isn't refundable, you can roll over unused credits to the next year.
The tax credit could be worth up to 30% of the eligible expenses for systems installed through the end of 2032. The credit is worth up to 26% of the expenses in 2033, and then up to 22% in 2034 — it then expires.
If you don't own a home where you can install this type of equipment, you could still qualify for the tax credit by buying into an off-site community solar project. Solar equipment that you install at a vacation home (but not a rental property) can also qualify.
You might be able to claim local or state programs and tax credits or rebates when purchasing eligible equipment. North Carolina State University's Database of State Incentives for Renewables and Efficiency is a helpful resource for finding additional savings.
Can You Benefit from the Tax Credits?
In general, tax credits can save you more than tax deductions because they lower your tax bill on a dollar-for-dollar basis rather than reducing your taxable income. And these credits — along with additional rebates and incentives — may make energy-efficient improvements more affordable and accessible to people.
However, the tax credits above aren't refundable, meaning they can't increase your tax refund if you don't owe anything. Some of them also aren't refundable, which means you can't carry over the unused portion of a credit to future years. With this in mind, it's worth reviewing your finances and tax situation to determine how a credit might impact your taxes.
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