The Inflation Reduction Act of 2022 expanded and extended some major energy tax credits, giving taxpayers more opportunities to save money on energy-efficient improvements to their homes and the purchase of eligible clean vehicles. Here’s what you should know to help your clients take advantage of the 2023 energy tax credits.
What are the energy tax credits?
There are several “energy tax credits,” which the IRS categorizes as Clean Energy and Vehicle credits. Several of these credits are available only to specific types of businesses, such as builders of energy-efficient homes or commercial buildings. For most taxpayers, however, the most relevant energy tax credits will be the home energy and clean vehicle credits.
The home energy credits include the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit, which apply to certain home updates and improvements. The clean vehicle credits are designed to help offset the cost of purchasing certain qualified electric vehicles (EVs) or fuel cell vehicles (FCVs).
Who can claim energy tax credits for their home and vehicle?
The home energy credits are typically available the year the homeowner makes the qualifying improvements. The credits are most beneficial for homeowners improving their primary residence. However, the credits can also be claimed by renters improving their residence or homeowners improving a second residence. The credits do not apply to improvements made to a home not used as a residence by the owner, such as a rental property.
The Inflation Reduction Act of 2022 significantly updated the clean vehicle credits. They are available for individuals and businesses who have purchased a qualifying EV or FCV. Individual taxpayers may qualify for the credit for both new and used vehicles, while vehicles purchased for business use must be new.
The Clean Vehicle Tax Credits
You are most likely to see the two types of clean vehicle credits in the upcoming tax season: new clean vehicles purchased in 2023 for individuals and their businesses and used clean vehicles for individual use. You can review these IRS articles pages for information on claiming credits on 2022 tax returns or for claiming commercial clean vehicle credits.
New clean vehicles for personal use purchased 2023 or later
For new clean vehicles purchased in 2023 or later, your clients may qualify for a credit of up to $7,500. To qualify, the vehicle must be for personal use or the individual’s business (i.e., sole proprietorships and other business entities), and the taxpayer’s modified AGI must be equal to or less than these thresholds: $300,000 for married filing jointly, $225,000 for head of households, $150,000 for all other filers.
The credit is calculated differently depending on whether the vehicle was placed in service before or after April 18, 2023. To calculate the credit for vehicles placed in service between January 1, 2023, and April 17, 2023, start with a $2,500 base amount. Then, add $417 for a vehicle with at least 7 kilowatt hours of battery capacity and an additional $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours (up to the limit of $7,500).
Vehicles put in service on or after April 18, 2023, must also meet additional critical mineral and battery component requirements, which will determine how you calculate the credit. Vehicles that meet only either the critical mineral or batter component requirements will qualify for a credit of $3,750, while vehicles that meet both qualify for the full $7,500.
It’s important to know that your client only qualifies for the credit if the seller of the car has registered with the IRS to enable credits. They must also provide the buyer with information about the vehicle qualifications at the time of sale and must provide a report to the IRS with the vehicle’s information and the taxpayer’s name and TIN. Before attempting to claim this credit for your client, be sure to get a copy of this report and verify that the seller has submitted your client’s information to the IRS. To help your client claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit with their tax return.
Used Clean Vehicle Credit
The Used Clean Vehicle Credit is available to individuals who have purchased a qualifying used clean vehicle that cost $25,000 or less and is at least two model years older than the year in which they bought it (i.e. for tax year 2023, the vehicle must be a model 2021 or earlier). Additionally, the taxpayer cannot have claimed a clean vehicle credit within the previous three years and their modified AGI must be under the following thresholds: $150,000 for married filing jointly or a surviving spouse, $112,500 for head of households, $75,000 for all other filers.
The credit is calculated as 30% of the vehicle sale price, up to a maximum of $4,000. Just as you would for a new clean vehicle, you’ll use Form 8936 to claim the credit.
The Energy-Efficient Home Improvement Credit
The Energy-Efficient Home Improvement Tax Credit, as outlined by the IRS and Energy.gov, allows eligible homeowners to receive tax incentives for making energy-efficient improvements to their residences. This credit aims to promote energy conservation and reduce environmental impact by encouraging the installation of energy-efficient components in residential properties. The following are some of the eligible improvements included in the credit:
Heating & Cooling Tax Credits
- Energy-efficient central air conditioners and heaters (annual limit of $600), furnaces, boilers, and heat pumps
- Biomass stoves and boilers
Water Heating Tax Credits
- Energy-efficient water heaters (annual limit of $600), gas or oil boilers, biomass boilers
Building Products Tax Credits
- Exterior doors (annual limit of $250 per door and $500 total), windows and skylights (annual limit of $600), and insulation materials
Electric Panel Upgrade Tax Credits
- Improvements of or purchase of new, qualifying panelboard, sub-panelboard, branch circuits, or feeders (maximum annual limit of $600 for any such improvements)
Calculating credit amount
The credit a homeowner can claim is calculated as a percentage of the total improvement expenses in the year of installation. Before 2022, the credit was capped at a maximum of $500 over the lifetime of the taxpayer. Starting in 2023, however, the Inflation Reduction Act dramatically increased the credit:
- For years 2023 through 2032: A credit of 30% of the total improvement expenses, up to a maximum of $1,200. Certain improvements also have separate annual limits, as listed above. These limits count towards the total limit of $1,200.
- For heat pumps, heat pump water heaters, biomass stoves, and boilers, there’s a separate annual credit limit of $2,000 that does not count toward the annual $1,200 limit. This means your clients could claim up to $3,200 per year.
- These improvements have no lifetime limit, so your clients could spread out improvements over several years to maximize their credit amounts.
- This credit is not refundable, so while it can reduce total tax liability to $0, any remaining credit will not be added to a refund amount.
Residential Clean Energy Credit
The Residential Clean Energy Credit works similarly to the Energy Efficient Home Improvement Credit, allowing homeowners to claim a credit of up to 30% of the cost of the following improvements to their home:
- Solar, wind, and geothermal power generation
- Solar water heaters
- Fuel cells
- Battery storage
This credit has no annual maximum or lifetime limit, so homeowners can claim the full 30% of the total cost of the improvement for 2023-2032. Beginning in 2033, the credit amount will be reduced to 26%, then 22% in 2034. Like the Energy Efficient Home tax credit, the Residential Clean Energy Credit is non-refundable.
These tax credits not only benefit homeowners by reducing their federal tax liability; they incentivize improvements that save on energy bills, improve home comfort, and contribute to a more sustainable environment. By staying informed on the changes made by the Inflation Reduction Act, you can help your client claim the full amounts of these energy tax credits.