Energy Efficiency Tax Credits Explained: How to Make the Most of Upgrading Your Home or Buying an Electric Vehicle
By Trent Derrick, CMT®
The Inflation Reduction Act (1) introduced several tax credits to promote green energy and environmentally friendly purchases. Although the legislation was enacted in 2022, many of the energy-efficient tax incentives officially became available beginning on January 1, 2023. If you have plans for energy-efficient home improvements or you’re considering the purchase of an electric vehicle, it’s essential to explore these four tax benefits as a part of your financial tax strategy to optimize your expenses and increase your savings.
Energy Efficient Home Improvement Credit
This credit was originally capped at a total lifetime amount of $500, but it has been expanded by the Inflation Reduction Act. Taxpayers can now claim up to $1,200 annually (2) for certain home improvement expenditures (3) made on a principal residence between 2023 and 2033. Qualifying expenses include:
- Home energy audits
- Qualified energy-efficient improvements such as upgraded exterior doors, windows, skylights, and insulation materials
- Residential energy property expenses including central air conditioners, natural gas, propane, and oil water heaters
Taxpayers can claim 30% of the total amount spent on qualified upgrades. To make it slightly more complicated, each item type has its own credit limit. For instance, exterior doors can only be claimed up to 30% of $250 per door for a total of $500. It’s important to consult with a qualified tax professional to understand your exact credit amount.
Residential Clean Energy Property Credit
This is another credit that allows taxpayers to claim up to 30% on qualified energy-efficient purchases made between 2023 and 2033. The best part: there is no overall limit on the amount of the credit. Qualified expenses include:
- Solar panels
- Solar water heaters
- Fuel cell property
- Battery storage
- Wind turbines
- Geothermal heat pumps
As with the Energy Efficient Home Improvement Credit, all purchases must be installed at a principal residence. Purchases or upgrades made at a business or rental property will not qualify for the deduction.
Energy Efficiency and Electrification Rebates
This rebate program allocates $4.5 billion in funding for home electrification projects. These funds will be distributed to the states and administered through separate programs. Though the specifics of each program are still being developed, these rebates will create point-of-sale reductions in the cost of certain appliances (4) such as heat pump water heaters and electric stoves. Qualifying households can claim up to $14,000 in rebates.
Clean Vehicle Tax Credit
If you’re planning to purchase a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) this year, you may qualify for the clean vehicle tax credit. This is a $7,500 credit for qualified taxpayers and vehicle purchases. (5) It is available to both individuals and businesses as long as the vehicle is not bought for resale and is used primarily in the U.S.
Additionally, the vehicle must:
- Have a battery capacity of at least 7 kilowatt hours
- Have a gross vehicle weight rating less than 14,000 pounds
- Be made by a qualified manufacturer
- Undergo final assembly in North America
- MSRP can’t exceed $80,000 for vans, sport utility vehicles, and pickup trucks
- MSRP can’t exceed $55,000 for other vehicles
Keep in mind that there are restrictions around which vehicles qualify for the credit. For instance, vehicles with minerals or components sourced from foreign entities of concern such as Russia or China will not qualify. (6) Lastly, the credit is phased out for taxpayers with an AGI above certain limits.
Make the Most of These Credits
If you’re gearing up for a large home improvement or considering an energy-efficient vehicle purchase, you’ll want to take the time to explore these credits. They have the potential to offer large rebates and significant tax savings.
For tailored guidance on how the provisions of the Inflation Reduction Act relate to your specific circumstances, don’t hesitate to get in touch with us! At Legacy Wealth Management, we’re here to help you optimize your expenses and manage the tax implications effectively. Reach out to book a consultation with me here or email me at trent@legacywm.com.
About Trent
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT®) professional. Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Legacy Wealth Management and LPL Financial do not offer tax advice or services.
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(1) https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/
(4) https://www.solar.com/learn/home-energy-efficiency-rebates-and-tax-credits/
(5) https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after