Recently the Inflation Reduction Act (IRA) was signed into law. Although there are varying opinions by experts on if it will reduce inflation, it does contain provisions to extend and modify many climate and energy-related tax credits.
Nonbusiness Energy Property
Prior to the enactment of IRA, you were allowed a personal tax credit for certain nonbusiness energy property expenses for property placed in service before January 1, 2022. With the enactment of IRA, the Credit was renamed the Energy Efficient Home Improvement Credit and is now extended for energy-efficient property placed in service before January 1, 2033.
In addition, the new law also increases the credit for a tax year to an amount equal to 30% of:
- The amount paid or incurred by you for qualified energy efficiency improvements installed during the year, and
- The amount of the residential energy property expenditures paid or incurred during that year.
The credit is further increased for amounts spent for a home energy audit (up to $150).
With the enactment of the IRA, the lifetime credit limitation was repealed and instead limits the credit to $1200 per taxpayer per year. Annual limits were also enacted, $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior doors ($500 total for all exterior doors). An annual limit of $2,000 also applies with respect to amounts paid or incurred for specified heat pump, heat pump water heaters, and biomass stove/boilers.
The Home “Clean” Energy Tax Credit
Preceding the IRA being enacted, a personal tax credit was allowed, known as the Residential Energy Efficient Property (REEP) Credit. The REEP credit applied to solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes before 2024.
The enact law updates the REEP credit to the Residential Clean Energy Credit (RECE). The credit is now available for property installed before 2035. It also makes the credit available for qualified battery storage technology expenditures after 2022.
New Vehicle “Clean” Tax Credit
Before the enactment of the lRA law, a credit of up to $7,500 could be claimed for each new qualified plug-in placed into service during the year.
With the enactment of the new law, the credit was renamed the Clean Vehicle Credit and additionally eliminates the limitation on the number of vehicles eligible for the credit. The update also requires final assembly to take place in North America.
Previously there were no income limitations associated with the credit. With the new law beginning in 2023, income limitations will be enacted. A credit will not be allowed if your modified adjusted gross income (MAGI) for the year of purchase, or the preceding year exceeds $300,000 for a married couple filing jointly. $225,000 for a head of household, or $150,000 for all others.
Additionally, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
The calculation of the credit is also changing. The new rules are complicated, with more emphasis placed on where the batter components are sourced.
New Used Vehicle “Clean” Tax Credit
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed a tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if your MAGI for the year of the purchase or the preceding year exceeds $150,000 for married couples filing jointly, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
Please contact your Wegner CPAs tax advisor if you have questions about taking advantage of these new and revised tax credits.