Get to Know the IRA's Residential Energy Tax Credits
February 27, 2023 •Alyssa Latuchie
The Inflation Reduction Act (IRA) made clean energy history in the summer of 2022. Those of us tracking climate change and reporting on energy efficiency with the same voracity the rest of the country has put into Season 4 of Stranger Things are particularly excited about the opportunities the IRA offers residential energy consumers. However, as anyone who has achieved an ambitious goal can tell you, good things take time. Most of the diverse offerings contained within the IRA are not yet on the market, creating a flurry of questions and uncertainty.
That doesn’t mean all is lost for those ready to dive into all the IRA has to offer today. Throughout 2023, funding from the IRA will be directed at state energy offices to set up rebate programs, and to the federal Department of Housing & Urban Development for energy and water efficiency grants and loans. Keep in mind guidelines have not been provided on rebates like the HOMES and HEERHA programs yet; however, it’s clear that state energy offices will need experienced implementation partners for the programs to be successful, and early planning will be crucial.
And a portion of the IRA is available right now that benefits both utilities and energy consumers. As of January 1, 2023, the federal residential tax credit, also known as 25C, is available for action. While these tax credits may not be as exciting as point-of-sale rebates or performance-based incentives, they can still be used to drive energy consumers toward energy-efficient technologies and services.
The credit can be used for:
- exterior doors, windows and skylights, insulation materials or systems, and air sealing materials or systems
- central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; and improvements to panelboards, sub-panelboards, branch circuits, or feeders
- home energy audits
Undoubtedly, the IRA will accelerate the clean energy revolution, curb emissions, and give those of us in the industry the tools necessary to make clean energy, clean fuels, and clean vehicles an equitable reality for all Americans. Kickstart that reality today by helping your customers take advantage of the residential energy tax credits.
The full guidelines have not yet been published by the IRS on residential tax credits, so there are still some questions that have yet to be answered. However, this is what has been shared in a nutshell:
- The residential tax credits are available for homeowners to make bread-and-butter efficiency upgrades to their homes, such as insulation, heating equipment, and central air conditioners.
- Homeowners can claim up to 30% of project costs on their tax returns. Up to $2,000 can be claimed if a heat pump is part of the retrofit, with an additional $600 available for an electrical panel upgrade and another $150 for a home energy audit performed by an accredited field technician.
- The total value of the tax credit is capped at $3,200 per year, per customer, but this credit can be used every year. Utilities can work with their customers to create a planned approach, prioritizing different efficiency upgrades each year. This will allow the customer to complete a variety of upgrades within budget, while saving energy and money.
Used appropriately with residential customers, the tax credit can go a long way in helping utilities reach annual savings goals.
Here are some other key features to keep in mind while working with your customers to help make those efficiency upgrades a reality:
- The tax credit can be stacked with ratepayer-funded incentives; however, the value of the incentive cannot be considered part of the cost of the project.
- Products and retrofits must meet specific energy efficiency criteria to qualify for the tax credit. Full details can be found here.
- The tax credit is non-refundable, meaning it will reduce a taxpayer’s overall liability, but it will not be refunded to the taxpayer in the event they don’t have tax liability equal to the credit.
- The tax credit cannot be rolled forward to future years. It must be used in the tax year upgrades or retrofits are performed.
- The taxpayer can only take advantage of the tax credit if they include itemized deductions, as opposed to taking the standard deduction, on their tax return.
At Franklin Energy, we are experts at energy efficiency upgrades, but we like to leave taxes to the tax professionals. Be sure to refer all customers to the IRS or their personal accountant for detailed tax advice.
Between energy and water improvements, rebates, clean energy initiatives, and the tax credits, the IRA has a lot to offer and a lot of program planning, design, and implementation to navigate. Franklin Energy can help. We bring the knowledge and expertise to streamline the customer and contractor experience and support the efficient implementation of these overlapping offerings.