The landmark Inflation Reduction Act includes many programs to accelerate the transition to clean energy across the U.S. Tax credits for home efficiency upgrades, clean energy installations, and new energy efficient home construction credits are the programs most likely to benefit Alabama homeowners in 2023.
In this article, we’ll guide you through the tax credits available to homeowners under the IRA. This is the first of several guides that we’re working on, so if you’re a renter or a homeowner who cannot benefit from federal income tax credits, stay tuned–we have some different resources for you coming soon.
Energy Efficiency Home Improvement Credit
The Inflation Reduction Act modified and expanded the existing tax credit programs for energy efficiency improvements in residential homes. This article covers the tax credits available for tax years beginning January 1, 2023.
It’s helpful to remember that tax credits reduce the amount of federal income tax you would otherwise pay for the year. For that reason, tax credits are more valuable than tax deductions. The exact value to you of any particular tax credit will depend on your federal income tax liability in the given year.
The Energy Efficient Home Improvement Credit may not be carried forward. If your federal income tax liability is too low to take advantage of the full credit available in a particular year the unused credit will be lost.
Annual Maximum Credit Available
There are separate annual maximum credits available, depending on the type and category of home improvement.
The two relevant annual maximums under the Energy Efficiency Home Improvement Credit are:
- $1,200.00 in tax credits (per year) are available to homeowners for the installation of qualified* energy efficient systems and improvements in the categories of building envelope components, home energy audits and energy property.
- A separate annual aggregate credit limit of $2,000 is available for electric or natural gas heat pumps, electric or natural gas heat pump water heaters, biomass stoves, and biomass boilers.
In addition to the annual maximums for the two categories above, there are also dollar limits applicable to each type of improvement. We list these below.
Due to these maximum annual limits and the limits on credits for types of improvement, most homeowners will benefit from scheduling out the home energy efficiency improvements over a couple of years to maximize the credits.
Much of the information in the next section is from, or adapted from, IRS Fact Sheet FS-2022-40, December 2022. This IRS Fact Sheet includes further details on the efficiency requirements needed to qualify for the tax credit.
Types of Improvements and Property
Subject to the annual limits above, tax credits are available for the following types of improvements:
- Building envelope components that meet the requisite Energy Efficiency Requirements (see IRS Fact Sheet FS-2022-40 for details). Building envelope components include:
- Exterior Doors (30% of costs up to $250 per door, for a total limit of $500)
- Exterior Windows and Skylights (30% of costs up to $600); and
- Insulation materials or systems and air sealing materials or systems (30% of costs).
- Electric panel and wiring upgrades (30% of costs, up to $600)
- Home energy audits (30% of costs, up to $150)
- Residential Energy Property (30% of costs, including labor, up to $600 per item):
- Electric or natural gas heat pumps
- Electric or natural gas heat pump water heaters
- Central air conditioners
- Natural gas water heaters
The above list is not all-inclusive, but we have identified the types of improvements likely to be most relevant to Alabama homeowners.
*Please note that not all ENERGY STAR certified appliances and systems qualify for these IRA tax credits. The credits under the Energy Efficiency Home Improvement Credit are only available for systems and improvements that meet the requisite energy efficiency standards defined by federal regulations. Visit EnergyStar.gov and/or the IRS Fact Sheet FS-2022-40 to get details on the energy efficiency specifications required to qualify for tax credits Energy Star certified purchases that do not meet the requirements for the tax credit may still qualify for rebates from the manufacturer or your local utility.
Home Energy Audits & the Energy Efficient Home Improvement Credit
Home energy audits must meet certain requirements to qualify for the Energy Efficient Home Improvement Credit. The audit must be in writing, include an estimate of energy and cost savings for each improvement, and the auditor must have the requisite professional certification and credentials to qualify as an auditor under federal regulations. We recommend checking for IRS updates on the specifics as further guidance is supposed to be forthcoming. You can also check ENERGYSTAR.gov for updates.
Labor Costs & Energy Efficient Home Improvement Credit
You may ask whether labor costs associated with the installation can be included in the amount used to determine the total costs for the above. The answer is “it depends.” We recommend taking a look at IRS Fact Sheet FS-2022-40 to determine the rules for your particular energy efficiency project.
Residential Clean Energy Property Credit
The Residential Clean Energy Property Credit credit is available only to homeowners for their main residence. The home can be your existing main residence or a newly-constructed primary residence. A few improvements to a second home might qualify for credits under this program, but we won’t get into the details of credits for second homes.
The Residential Clean Energy Property Credit is NOT available to landlords for improvements made to rental homes. Renters/tenants may qualify for the Residential Clean Energy credit for certain improvements made to the house they are living in as their principal residence, but we will save that for a separate article focused on IRA programs of interest to renters.
Clean Energy Equipment & the Amount of Credit
From 2023 through 2032, homeowners can receive a tax credit of 30% of the cost to purchase and install clean energy equipment on their main home, provided the improvements meet the requisite energy efficiency requirements. There is no cap on the amount of the credit, which is available for all “qualified expenditures” associated with the project, including some labor costs (see below).
Clean energy equipment includes:
- Solar Electric Property (include: solar panels, system equipment, and energy storage)
- Solar Water Heating Property
- Small Wind Energy Property
- Geothermal Heat Pump Property
- Biomass Fuel Property
As noted above, there are energy efficiency requirements to qualify for the Residential Clean Energy Property Credit. In particular, battery storage property must have a capacity of 3 kilowatt-hours or greater. More details on energy efficiency requirements can be found in the answer to Question 2 of IRS Fact Sheet FS-2022-40, available here.
Certain labor costs can be included in calculating the Residential Clean Energy Property Credit. The IRS Fact Sheet FS-2022-40 says labor costs “properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home” can be included.
Any unused Residential Clean Energy Property Credit may be carried forward into future tax years, if the homeowner does not have enough federal income tax liability in the year of installation to take advantage of the full credit available for the project.
EV Charging Station At Your Home
If you own an electric vehicle–or plan to purchase one soon–you can qualify for another federal income tax credit if you install an EV charging station at your home.
This credit exists thanks to the extension of a program known as the Alternative Fuel Refueling Property Credit, which is available to homeowners as well as for commercial property owners.
Individuals who use the EV charging station for personal use can claim a credit of the lesser of $1,000.00 or 30% of the cost of EV charging equipment and installation.
On the off chance you also own business property and prefer to install a charging station at the business, there’s a tax credit available for that EV charging station, as well, and the amount is higher, but subject to certain other rules applicable to business tax credits under this same program.
You claim the credit by filing Form 8911 with your federal income tax return. Details available here.
Credits for ENERGY STAR / Zero Energy Ready Certified New Homes
If you’re planning to build a new custom home and want it to be ENERGY STAR Certified or Zero Energy Ready Certified, you may have a negotiating tool with your general contractor, since the builder may qualify for a sizable tax credit under Section 45L.
Section 45L credits are available to the builder of new homes that meet one of the two certification requirements:
- ENERGY STAR Certified Single Family Home ($2,500 tax credit to builder)
- Zero Energy Ready Home ($5,000 federal income tax credit to builder)
The details of this program are beyond the scope of this article, since the credits go to the builder. We will be working on resources on this program with content for builders and will add a link here to anything new we publish. For now, to learn more visit: https://www.energy.gov/eere/buildings/45l-tax-credits-zero-energy-ready-homes.
As we said at the beginning, we have more resources planned for renters and for homeowners who can’t benefit from the federal income tax credits.
At this time, the federal guidelines for rebate programs for the efficiency upgrades and clean energy equipment are still in development. Once those guidelines are published, the state of Alabama will have to design a plan for implementation and submit that plan to the U.S. Department of Energy for approval. We don’t expect these steps to be finalized before Fall 2023, so it will be several months before we can provide updates on how these rebates will be accessed in Alabama.