How Solar, EVs Use Climate Law’s New Environmental Tax Breaks

  • The Inflation Reduction Act includes some environmental incentives that take effect on January 1.
  • The bill includes tax credits for electric vehicles, solar panels and home energy upgrades.
  • Americans could save thousands by making their homes more efficient while claiming tax credits.

The De-Inflation Act—the major tax, climate, and health care bill that Democrats passed through Congress last year—includes a number of environmental initiatives that many Americans can use at home.

These initiatives include ten years of consumer tax credits to make homes more sustainable and energy efficient, as well as incentives to buy electric vehicles or hybrids. Some of the measures took effect after President Joe Biden signed the law in August, but many more took effect or were extended on Jan. 1.

Here are some green initiatives and tax breaks in the bill that Americans can start taking advantage of at home today.

Installation of solar energy

Households that equip their homes with rooftop solar can receive a tax credit to cover 30% of the installation costs, reducing the cost of solar installation by thousands of dollars. To take advantage of the tax credit, you can install solar on your property, for example by hiring a licensed solar installer certified by an organization such as the North American Board of Certified Energy Practitioners.

30 percent of everything you spend on the installation — including labor, solar panels, energy storage devices and other equipment — can be claimed as a federal tax credit. According to the Center for Sustainable Energy, the average size for a residential solar system is 5 kW and costs about $20,000. At this price, the tax credit claimed would be $6,000.

The solar tax credit will run through 2032 and will decrease and expire in 2035 unless Congress renews it.

Insulation and ventilation

There are several ways to make a home more energy efficient, saving money on heating and cooling, including sealing windows and doors, improving insulation, and replacing your gas furnace with an electric heat pump. The first step is to undergo an energy audit to understand what your home needs.

A home energy audit – also called a home energy assessment – involves a professional assessment of how much energy your home is using and where there are any inefficiencies that could be improved. The auditor will then recommend further steps. Estimates can range from $100 to $600 depending on the size and location of your home. Alternatively, you can carry out a DIY home energy assessment.

Starting Jan. 1, households can claim up to $150 in tax credits for an energy audit by a professional inspector. Any upgrades made after the appraisal, such as adding insulation or efficient windows and doors, can be claimed as a tax credit of up to 30% of the total value, or $1,200.

Replacing your gas furnace with a heat pump

According to RMI, more than 10% of US carbon emissions come from gas and fuel oil used for heating and cooking. But heat pumps, which move cold air from one place to another, can be up to four times more efficient than a gas furnace. RMI said that by 2020, 99% of US homes could reduce their carbon emissions by replacing a gas furnace with a heat pump.

Under the IRA, households that install a heat pump can claim a tax credit of 30% of the total cost of purchase and installation, up to $2,000.

Low- and moderate-income households can benefit even more by receiving rebates that can reduce the cost of a heat pump by up to $8,000. Households can get up to $4,000 in rebates if electrical upgrades are needed to install heat pumps. These rebate programs vary from state to state and may be through utility companies or a government agency, so you’ll need to research the specifics for your state.

Buy an electric car

Incentives for buying new or used electric vehicles have also been increased in the new climate bill.

For new cars, individuals earning less than $150,000, households earning $225,000, or joint employees earning less than $300,000 may qualify for a tax credit of up to $7,500. Vehicles must be made in the United States and cost no more than $80,000 for trucks, vans and SUVs, and $55,000 for others such as sedans. The IRS has compiled a preliminary list of models that will be eligible.

Families with qualifying income to purchase a used electric vehicle can receive a tax credit of up to $4,000, provided the vehicle is at least two years old and costs no more than $25,000.

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