What You Need To Know to Benefit from the Inflation Reduction Act
Let’s Break It Down.
The Inflation Reduction Act of 2022 was signed into law by President Joe Biden in August of last year. It contains $500M in provisions targeted at energy improvements, lowering healthcare costs, on-shore manufacturing, and other environmental concerns including transportation, agriculture, and water.
Myriad programs will grow out of this Act. Our focus here will remain on Federal tax breaks and State rebates for upgrading home energy systems. These allowances are designed to encourage homeowners to install more electrical and energy-efficient systems to reduce carbon emissions.
Energy-Efficient Home Improvement Credit
The IRA expands Section 25C of the IRS code, also known as the Energy-Efficient Home Improvement Credit. Under the previous version of the code, homeowners could receive a lifetime maximum of $500. Under the new law, the allowance is expanded to an annual credit of roughly $1200 annually for energy-saving home improvements, with greater allowances for specific projects.
It’s important to note from the start that Federal funds are given in the form of tax credits – NOT rebates. IRA investments are non-standard deductions but homeowners are not required to itemize these on tax returns. Any tax professional and most tax filing software can help you determine best to include your home improvements in your annual tax filing.
You can file for tax credits in four categories: Building Envelope Components (Weatherization); Home Energy Audits; Residential Energy Property; Heat Pumps, Biomass Stoves/Boilers. We’ll dive into each of these in further detail momentarily. However, we want to point out here that you can only apply for ONE credit in each category each year. So, if you complete two improvements in a given category, you will have to save one for the following year. You can, however, apply for credits in more than one category.
The Categories: What’s in Each?
Category 1: Building Envelope Components (Weatherization)
If you’re unfamiliar, the building envelope consists of any part of your home that provides a barrier between you and the outdoors. Gaps in your home’s envelope allow energy – and conditioned air – to escape to the outside, making your systems work harder. Improvements in this category include things that help seal up the envelope and close these gaps, keeping all the good stuff inside. Some examples:
- Air sealing (like Aeroseal) and insulation materials – 30% allowance up to $1200
- Exterior windows/skylights – 30% up to $600
- Exterior doors – 30% up to $250 per door – max $500
Category 2: Home Energy Audits
Home Energy Audits are performed by home HVAC professionals and determine where your home is losing energy and where you can make improvements. All American Heating’s Home Energy Check-Up involves using infrared cameras and blower-door tests to expose gaps in your home’s exterior envelope and insulation levels. Next, we’ll evaluate your home’s mechanical systems for age and efficiency. You’ll receive a Home Energy Conservation Plan that will identify areas in which you can make energy-efficient upgrades – and if we recommend replacing any systems, we’ll help you identify how to maximize the tax credits available under the Act.
- Home Energy Audits – 30% credit allowance up to $150.
Category 3: Residential Energy Property
First, let’s note that “residential energy property” is just a fancy way of saying “home mechanical systems” – things like your heating system, air conditioning, or electrical circuits or boards. Qualifying improvements in this area will include upgrades to more energy-efficient systems such as central air, natural gas/propane/oil water heaters, and improvements to your electrical panelboards, circuitry, or feeders.
- Residential Energy Property – 30% up to $600
Category 4: Heat Pumps/Biomass Stoves/Boilers
This category encourages homeowners to upgrade their homes with options that reduce carbon emissions, like Electric/Natural Gas Heat Pump Water Heaters, Electric/Natural Gas Heat Pumps, Biomass Stoves, or Boilers. This category also offers the highest level of benefit.
- Heat Pumps, Biomass Stoves/Boilers – 30% up to $2,000
How It Works
First: It’s important to understand exactly what’s covered. For instance, in categories 1-3, labor is not covered by the tax credit. However, in category 4, labor IS covered. So, bear that in mind when you are deciding what investments to undertake.
Second: Recognize that you can combine categories, but you can’t include more than one investment in each category. For example, if you have several exterior doors installed, only one of them will qualify; BUT, if you have an energy audit AND have a heat pump installed, they would both qualify for the credit in the same year – up to the allowed limits for each. This is because they each fall under separate categories.
Third: The Inflation Reduction Act tax credits are in play only until 2032.
Finally: You are eligible to use these tax credits if you meet the following criteria:
- Own your home
- Pays taxes
- Purchase must be made after January 1, 2023
- Home can be first or secondary residences
This calculator from Rewiring America can help you determine how much you can get in tax credits and with which improvements.
High-Efficiency Electric Home Rebate Act (HEEHRA)
The second part of the program falls under section 45L and is called the High-Efficiency Electric Home Rebate Act (HEEHRA). This part of the program is designed to help low- to moderate Income (LMI) households convert to energy-efficient electric systems in their homes or upgrade to more modern systems. The idea is to help LMI families save money on their utility bills, live a healthier lifestyle at home, and reduce their homes’ carbon emissions.
The program is distributed in the form of off-the-top, point-of-sale consumer rebates given at the time of purchase. It will cover 100% of electrification costs up to $14,000 for low-income households and 50% of costs up to $14,000 for moderate-income families.
The good news is, LMIs are determined based on the mean (middle) income in your area, which means you’re not up against a national standard to qualify. It’s relative to the income levels where you live. In addition, qualifying project costs include both equipment and installation.
Projects that will be eligible for these rebates will include things like:
- Heat pump HVAC systems
- Heat pump water heaters
- Electric stoves and cooktops
- Heat pump clothes dryers
- Upgrading circuit panels
- Insulation
- Air sealing
- Ventilation
- Wiring
These rebates will be administered by each of the individual 50 states, and we’re waiting for Colorado to get their program up and running. The programs are expected to be rolled out later this year and will carry through to December 31, 2032. Check back here for updates as they become available.
In the meantime, if you need assistance with the projects described above – give us a call at 970-453-6640. We are At Your Service!