The Inflation Reduction Act (IRA) was recently signed into law—and experts vary in their opinions about whether it will indeed help reduce inflation. The details of the law, though, may be of interest to individuals because it contains, extends, and modifies many climate and energy-related tax credits.
Keep reading to learn more about the IRA and how it could affect you as a taxpayer.
Non-business energy property
Prior to the IRA, taxpayers were allowed a personal tax credit for select non-business energy property expenses that was only applicable to property placed in service before January 1, 2022. Now, this credit has been extended for another decade, and it will apply to all energy-efficient property placed in service before January 1, 2033.
The new IRA also increases the tax year credit to an amount equal to 30% of:
- The amount paid or incurred for qualified energy efficiency improvements installed, and
- The amount of the residential energy property expenditures paid or incurred
The credit is further increased for amounts up to $150 spent for a home energy audit.
The IRA also repeals the lifetime credit limitation, instead limiting the credit to $1,200 per taxpayer, per year. Additional annual limits include:
- $600 for credits with respect to residential energy property expenditures, windows, and skylights
- $250 for any exterior door—$500 total for all exterior doors
- $2,000 for credits with respect to amounts paid or incurred for certain heat pumps, heat pump water heaters, and biomass stoves/boilers
Changes to the REEP Credit
Prior to the IRA, taxpayers were allowed the Residential Energy Efficient Property (REEP) Credit—a personal tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed prior to 2024.
The IRA now makes that credit available for property installed before 2035, and for qualified battery storage technology expenses.
New clean vehicle credit
Prior to the IRA, taxpayers could claim a credit for each new qualified plug-in electric drive motor vehicle placed in service in a given year. The new law’s clean vehicle credit provision removes the limit on the number of credit-eligible vehicles. It also requires that final vehicle assembly must take place in North America.
Income limitations will begin in 2023, with no clean vehicle credit allowed if your modified adjusted gross income (MAGI) for the year exceeds:
- $300,000 for a married couple filing jointly
- $225,000 for a head of household
- $150,000 for others
Additionally, credit will not be allowed if a manufacturer’s suggested vehicle retail price exceeds $55,000—or $80,00 for pickups, vans, or SUVs.
The credit calculation method will also change. While the rules are complex, they place more emphasis on where battery components and their critical minerals are sourced.
Learn more about the clean vehicle credit on the IRS website.
Used clean vehicle credit
For qualified buyers who acquire and place a previously owned clean vehicle in service after 2022, a tax credit will be allowed that is equal to the lesser of $4,000 or 30% of the sale price.
No credit will be allowed if your MAGI for the year exceeds:
- $150,000 for married couples filing jointly
- $112,500 for a head of household
- $75,000 for others
Additionally, the maximum price per vehicle is $25,000.
Work with a qualified tax professional
Are you interested in taking advantage of these new tax credits? Contact us to discuss your taxes with a knowledgeable tax advisor.