Greenbacks for Green Energy
Clean Energy Tax Credits and Rebates in the Inflation Reduction Act
President Joe Biden signed the Inflation Reduction Act into law. In addition to provisions such as increased IRS funding, tax increases on large corporations, and healthcare provisions such as extending Affordable Care Act subsidies, capping insulin costs, and allowing Medicare to negotiate certain drug prices, the Act purports to take much needed action against the increasing damage being caused by climate change.
Talking heads, economists and climate scientists will likely butt heads for years on the effectiveness of the Act’s provisions intended to encourage everything from natural and artificial carbon sequestration to the insourcing of solar panel, wind turbine, and battery manufacturing to the United States, and ultimately only history will vindicate any particular stance. For the rest of us, however, several individual tax and rebate provisions may impact how we personally go about reducing our carbon footprints.
Electric Vehicle Credit
One such tax provisions is the extension and modification of the Internal Revenue Code Section 30D electric vehicle credit. Previously the credit, which was available for the first 200,000 purchasers of electric vehicles per manufacturer, was between $2,500 and $7,500 depending on the battery capacity of the vehicle. Once a manufacturer sold 200,000 vehicles, they entered a phase out period where a partial credit was allowed for purchases, followed by a disallowance of the credit. No credit was allowed for purchasers of used electric vehicles. Previously, many of the vehicles which applied for the credit were high-cost luxury vehicles. This made the credit unavailable to many lower income Americans for whom the operating cost savings of electric vehicles remained purely theoretical.
While electric car technology has become more well established and broadly adopted, it has often remained expensive, and the Act attempts to rectify this by several important modifications to the credit. First, it extends the credit of up to $7,500 through the year 2032. Second, it creates a separate credit of up to $4,000 (or 30% of the purchase price, whichever is less) for used electric vehicles at least two model years old. Third, it takes away the credit from more expensive vehicles and higher earning taxpayers. Specifically, it limits the price of the vehicles which would qualify for the credit to under $55,000 for new sedans, under $80,000 for new SUVs, trucks and vans, and under $25,000 in the case of used vehicles. Additionally, the credit would be unavailable to single taxpayers with modified adjusted gross income over $150,000 ($300,000 for married taxpayers and $225,000 for heads of household). Fourth, in order to encourage domestic job growth in the electric vehicle industry and clean energy more broadly, there would be a requirement that final assembly be within the U.S., as well as certain key materials being sourced from within the U.S. Fifth and critically, the Act would expand the number of vehicles that could potentially qualify (assuming they can be made in the U.S. for a reasonable price), by removing the 200,000 vehicle cap, and allowing other clean energy vehicles, such as those with lower battery capacities or hydrogen fuel cells. Finally, it would allow the credit to be transferred to the dealer, allowing taxpayers who either don’t have enough tax liability to offset the credit or can’t float the price differential until tax time, to still take advantage of the costs savings.
Those looking to utilize the new provisions should pay close attention to the effective date on which certain prior provisions lapse, and certain new provisions take effect.
Increased Solar Tax Credit
Under current law, homeowners could get a 26 percent tax credit on solar systems installed between 2020 and 2022. That credit was set to drop in 2023 and expire in 2024. The Inflation Reduction Act increases the credit to 30 percent and extends it at that rate through 2032, after which it would drop back to 26%. For a $6,000 solar roof top installation, an $1,800 tax credit will now be available.
Rebates on Energy Efficiency
The Act also creates a number of rebates on items intended to reduce our energy consumption. While specific limits exist based on an individual’s income relative to their area, the rebates may be up to $1,750 on heat pump driven water heaters, $8,000 on heating and cooling, $840 on electric stoves, ovens, and heat-pump driven clothes dryers, $4,000 on circuit box breaker upgrades, $1,600 on insulation and ventilation, and $2,500 on wiring improvements, for a total of up to $14,000 in base rebates for homeowners looking to modernize their home, and save money on electricity while reducing their environmental impact.
An additional rebate of up to $8,000 for whole home retrofits that reduce energy usage by 35 percent or more, for a total combined rebate of up to $23,000.