The Inflation Reduction Act of 2022 is a sweeping piece of legislation, representing the largest ever investment in renewable energy, energy efficiency, and electric vehicles by the federal government. There are now five tax credits that can benefit homeowners and purchasers of electric vehicles.
What is a tax credit? Tax credits are bottom-line, dollar-for-dollar subtractions on your federal 1040 return. Credits can be carried ahead to future tax years if the credit exceeds taxes owed.
Renewable Energy and Energy Efficiency
The Residential Energy Efficiency Tax Credit, originally created in 2005, provides various tax credits for homeowners. The tax credit has been extended through 2032 by the Inflation Reduction Act, and values for purchases have been increased.
You can qualify for a tax credit up to $2,000 with the purchase of a natural gas or electric heat pump or hot water heater. Credits are also available on qualified HVAC equipment, insulation, energy-efficient doors, windows and certain energy improvements.
The Inflation Reduction Act delayed the phaseout of the Residential Renewable Energy Tax Credit, also created in 2005. Now, tax credits of 30% are available for eligible renewable energy equipment installed by homeowners through 2032. For example, if you spend $20,000 on a solar energy system, you’ll subtract $6,000 from federal taxes owed. For the first time, standalone energy storage systems are eligible for this tax credit.
The Plug-In Electric Drive Vehicle Tax Credit awards a tax credit of up to $7,500 to taxpayers who purchase a new electric vehicle. Vehicles purchased in 2023 will qualify for a tax credit of $3,750 if 40% of the critical minerals used in their batteries are extracted and processed in the U.S. or another nation with which the U.S. has a free trade agreement, or the batteries are recycled in North America. These percentages increase over time.
Other new tax credits include the Previously-Owned Clean Vehicle Tax Credit and the Alternative Fuel Vehicle Refueling Property Tax Credit.