The Ultimate Guide to Energy Efficiency Tax Credits
By Angela Dorsey
The issue of protecting our planet through energy-efficient means has been given front-and-center focus over the last decade. With innovations like electric cars and solar panels, people like you and me can do our part to protect the environment. The neat little side perk to this, however, is that you can also save money with these options, specifically with your taxes.
The Inflation Reduction Act included a variety of tax credits aimed at boosting green energy and climate-friendly purchases. While the law was passed in 2022, many of the energy-efficient tax provisions officially went into effect on January 1, 2023. Now’s the perfect time to make energy-efficient upgrades or purchase an electric vehicle to take advantage of these tax breaks.
Energy Efficient Home Improvement Credit
This credit was originally capped at a total lifetime amount of $500, but it has been expanded by the Inflation Reduction Act. Taxpayers can now claim up to $1,200 annually for certain home improvement expenditures made on a principal residence between 2023 and 2033. Qualifying expenses include:
- Home energy audits
- Qualified energy-efficient improvements such as upgraded exterior doors, windows, skylights, and insulation materials
- Residential energy property expenses including central air conditioners, natural gas, propane, and oil water heaters
Taxpayers can claim 30% of the total amount spent on qualified upgrades. To make it slightly more complicated, each item type has its own credit limit. For instance, exterior doors can only be claimed up to 30% of $250 per door for a total of $500. It’s important to consult with a qualified tax professional to understand your exact credit amount.
Residential Clean Energy Property Credit
This is another credit that allows taxpayers to claim up to 30% on qualified energy-efficient purchases made between 2023 and 2033. The best part: there is no overall limit on the amount of the credit. Qualified expenses include:
- Solar panels
- Solar water heaters
- Fuel cell property
- Battery storage
- Wind turbines
- Geothermal heat pumps
As with the Energy Efficient Home Improvement Credit, all purchases must be installed at a principal residence. Purchases or upgrades made at a business or rental property will not qualify for the deduction.
Energy Efficiency and Electrification Rebates
This rebate program allocates $4.5 billion in funding for home electrification projects. These funds will be distributed to the states and administered through separate programs. Though the specifics of each program are still being developed, these rebates will create point-of-sale reductions in the cost of certain appliances such as heat pump water heaters and electric stoves. Qualifying households can claim up to $14,000 in rebates.
Clean Vehicle Tax Credit
If you’re planning to purchase a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) this year, you may qualify for the clean vehicle tax credit. This is a $7,500 credit for qualified taxpayers and vehicle purchases. It is available to both individuals and businesses as long as the vehicle is not bought for resale and is used primarily in the U.S.
Additionally, the vehicle must:
- Have a battery capacity of at least 7 kilowatt hours
- Have a gross vehicle weight rating less than 14,000 pounds
- Be made by a qualified manufacturer
- Undergo final assembly in North America
- MSRP can’t exceed $80,000 for vans, sport utility vehicles, and pickup trucks
- MSRP can’t exceed $55,000 for other vehicles
Keep in mind that there are restrictions around which vehicles qualify for the credit. For instance, vehicles with minerals or components sourced from foreign entities of concern such as Russia or China will not qualify. Lastly, the credit is phased out for taxpayers with an AGI above certain limits.
Do You Have Questions About Energy Efficiency Credits?
I know we’re all looking for ways to make a difference in the world, while still caring for our financial situation. This is a perfect opportunity to do both. The thousands you save in taxes and rebates are a reason to celebrate as much as doing your part to help the environment.
At Dorsey Wealth Management, our goal is to give you financial clarity and confidence. We love to work with and partner with women who are determined to pursue their ideal future while making an impact in the world. Whether you have already been working with us and need to review your situation or are brand new and looking to make a change, we are excited to work with you. You can reach us at (310) 370-7776 or angela@dorseywealth.com.
About Angela
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.