The tax legislation that has received the most attention in the past year is the Inflation Reduction Act of 2022 (IRA of 2022), which was signed into law this August. One of its goals was to address climate change by offering tax incentives for going green. While some of these incentives are targeted at U.S. businesses, most are available to U.S. homeowners who make energy-saving home improvements.
Many of the tax benefits offered by the IRA of 2022 are not new but are actually extensions and modifications to existing credits that either had expired or were set to expire soon. For example, the nonbusiness energy property tax credit was renamed the energy efficient home improvement credit and extended through 2032. Beginning in 2023, the credit amount will be 30% of the costs of eligible home improvements made during the tax year, with a $1,200 annual limit.
The specific annual limits for improvements are:
- $150 for home energy audits
- $250 for exterior doors meeting Energy Star requirements ($500 total for all doors)
- $600 for windows and skylights meeting Energy Star’s most efficient certification requirements
- $2,000 for specified heat pumps and heat pump water heaters, biomass stoves and boilers (neither the $1,200 annual limit on total credits nor the $600 limit on other qualified energy property applies to this amount)
- $600 for other qualified energy property, including central air conditioners; electric panels and certain related equipment; water heaters powered by natural gas, propane, or oil; oil furnaces and water boilers
The IRA of 2022 also renames the residential energy efficient property credit as the residential clean energy credit. This credit was scheduled to expire at the end of 2023 but has been extended through 2034. The credit amount increased to 30% for 2023 through 2032 but drops to 26% in 2033 and 22% for 2034. The energy-efficient home improvement credit no longer applies to biomass furnaces and water heaters but will apply to battery storage technology with a capacity of at least three kilowatt hours.