From Appliances to Solar: What The Inflation Reduction Act Means for Homeowners

Katy Byrom

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Katy Byrom

August 22nd, 2022
Updated August 22nd, 2022

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If your old dryer is starting to sound more like a helicopter these days, help is on the way.

The landmark Inflation Reduction Act, signed by President Biden on Tuesday, contains a variety of measures aimed at reducing carbon emissions — including billions of dollars in tax credits and rebates to help consumers make serious energy improvements around the house.

So while the jury's still out on whether the law will actually do much to curb inflation, it could get you a great deal on a heat pump dryer. (More on what that is here.)

woman waves her hand to clear away smoke coming from her clothes dryer

Credit: Shutterstock

Here's where you can find savings under the new legislation.

Expanded tax credits on solar panel and battery storage systems

While federal tax credits for solar panel installation have been around since 2006, the new Residential Clean Energy Credit marks a robust expansion.

Under previous legislation, set to expire at the end of 2023, tax credits were capped at 26% for solar systems installed from 2020–2022, and 22% for systems installed in 2023.

The new bill re-ups the dollar-for-dollar tax savings to 30% of the total installation cost (the same amount homeowners could claim for systems installed prior to 2020) and extends the benefit through the next decade. For the first time, homeowners will also be able to use the credit to install battery storage systems alongside their solar panels.

For a new solar array costing $20,000, homeowners can expect to deduct about $6,000 from their tax bill. As an added benefit, anyone who already took the plunge to install solar panels in 2022 can claim the full 30% credit retroactively during the next tax cycle.

Real estate investors will be able to take advantage of a similar 30% commercial tax credit for solar panels, with additional incentives for installations made in low-income communities or on qualifying low-income housing projects.

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Rebates on energy-efficient appliances and home improvements

On top of federal tax breaks for solar panel installation, homeowners will be able to bring additional savings indoors through a new High-Efficiency Electric Home Rebate program. The program, which will be administered at the state level, includes up to $14,000 in direct rebates on certain energy-efficient appliances and upgrades.

Specific projects that would qualify for a rebate under the new legislation include:

  • Up to $1,750 for a heat pump water heater
  • Up to $8,000 for a heating/cooling heat pump
  • Up to $840 for an electric stove or cooktop
  • Up to $840 for a heat pump clothes dryer
  • Up to $4,000 for a new electric panel
  • Up to $1,600 for upgraded insulation, air sealing, and ventilation
  • Up to $2,500 for updated electrical wiring

For households earning below 80% of the area median income (AMI), rebate limits are substantial enough to cover the full cost of the project. The typical heat pump, for example, costs anywhere from $4,167 to $7,431 to install, while the maximum rebate allowance for a low-income household is $8,000.

Those making 80–150% of the AMI would qualify for a 50% rebate on eligible electrical upgrades.

👉 TIP: Curious if you meet the income requirements for the new energy-efficiency rebates? Fannie Mae offers a free tool to help you find the median income in your area based on zip code.

Apart from rebates on specific appliances and systems, homeowners will also be able to recoup between $2,000 and $8,000 for improvements that reduce a home's overall energy output — such as adding attic insulation or sealing off the spaces around a home's plumbing and ductwork. The rebate amount will depend on the achieved reduction in energy use.

Total Energy Reduction
Maximum Rebate
>35%
80% of project cost (up to $8,000)
25–35%
80% of project cost (up to $4,000)

Before the rebates can go into effect, states will need to apply for funding and figure out how to implement the programs at the local level. From there, you can expect to see plenty of advertisements from retailers offering discounts on appliances and installations.

Tax deductions for whole-house energy efficiency improvements

While waiting around for rebates to kick in, homeowners can take immediate advantage of tax credits for similar energy-efficiency home improvements.

The Inflation Reduction Act revives the previously-expired Nonbusiness Energy Property Credit for 2022 — good for up to a $700 lifetime tax break — and replaces it with an annual tax credit worth up to $2,000 starting in 2023.

Specific items earmarked for the Energy Efficient Home Improvement credit include:

  • Up to $150 for home energy audits
  • Up to $500 for exterior door replacements ($250 per door)
  • Up to $600 for:
    • Exterior windows and skylights
    • Central air conditioners
    • Electric panel upgrades
    • New electric panels
    • Natural gas/propane/oil water heaters
    • Natural gas/propane/oil boilers or furnaces
  • Up to $2,000 for:
    • Heat pumps (water heater or general heating and cooling)
    • Biomass stoves/boilers

The total household tax deduction will be capped at $1,200 per year — though installing a heat pump will bump the annual cap to $2,000.

Modified tax credits for new or used electric vehicles

The Inflation Reduction Act also extends the $7,500 tax credit for the purchase of new electric vehicles. The bad news is, you may not be able to use it to buy a car given the strict requirements on which models qualify.

The bill effectively ends the credit for EV models produced outside the United States and places restrictions on where domestic models' batteries and other parts are sourced and assembled.

Once those manufacturing guidelines go into effect at the end of the year, reports the Alliance for Automotive Innovation,[1] fewer than 30% of electric vehicles on offer in the U.S. would qualify for the credit.

The Department of Energy yesterday released a list of vehicles that currently qualify for the new Clean Vehicle Credit. However, some of the cars — including most models produced by Chevy, GMC, and Tesla — have already met the sales cap for the year.

Additional red tape rolled out over the next few years could disqualify more models from the list — that is, unless manufacturers change their production plans.[2]

Car buyers will also face stricter eligibility criteria under the revised tax credit, including:

  • A sticker price that can't exceed $55,000 on a sedan or $80,000 on a truck or SUV
  • Income caps set at $150,000 per year for individuals, or $300,000 for joint filers

A potential bright spot in the new Clean Vehicle Credit is the expansion of the tax break to cover certain plug-in hybrid and other clean-emissions vehicles. The Inflation Reduction Act also provides a new tax credit of up to $4,000 for the purchase of a used model.

Language in the bill suggests that credits may be applied at the point of sale, meaning you won't have to wait until tax day to benefit — although, that provision won't go into effect until 2024.

Savings ahead — but they might take a while to get here

Taking advantage of new incentives to purchase an EV, install solar panels, and replace outdated appliances, water heaters, and AC units could save you $1,800 in yearly energy costs, according to analysis from Rewiring America.

However, you may need to wait a while for certain measures in the Inflation Reduction Act to take effect.

While tax credits for solar panel installation and energy-efficiency upgrades will be applied retroactively for 2022, direct rebates for energy-related home improvements won't trickle down to consumers until states get their individual programs up and running. You will most likely be able to access the rebate as discounts given at the point of sale.

Kiplinger reports that there is some uncertainty as to how the electric vehicle tax credit will work for the remainder of 2022, but the new EV credit — offering a mixed bag of benefits and restrictions — is expected to take full effect in 2023.[3]

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ARTICLE SOURCES
[1]

Alliance for Automotive Innovation. "What If No EVs Qualify for the EV Tax Credit? It Could Happen.." Accessed August 16, 2022. Updated August 5, 2022.

[2]

Elektrek. "Here are the cars eligible for the $7500 EV tax credit in the Inflation Reduction Act." Accessed August 17, 2022. Updated August 16, 2022.

[3]

Kiplinger. "Save More on Green Home Improvements Under the Inflation Reduction Act." Accessed August 17, 2022. Updated August 17, 2022.

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