Inflation Reduction Act Is Big a Win for Green-Home Remodelers

Americans looking to make energy-efficient home improvements are poised to receive millions of dollars in tax breaks after a broad spending package was approved by the Senate on Sunday.

The spending package, dubbed the Inflation Reduction Act of 2022, reshapes tax credits on home improvements. The legislation has a $1,200 annual tax credit for green remodeling, up from what had been a $500 lifetime cap.

The potential tax savings for homeowners thanks to the expanded credit under the energy bill would be an estimated $1.6 billion in 2023 alone, up from an estimated $253 million in 2022 for the old credit, according to Congressional Budget Office estimates.

The 10-year budget estimate is $14.5 billion.

“Taxpayers can budget out different energy-efficient upgrades over a 10-year period. Insulation one year. Windows and doors another year,” says Vincent Barnes, senior vice president of policy and research at the nonprofit Alliance to Save Energy in Washington, D.C.

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As part of the deal, the old $500 tax credit, which expired at the end of 2021, is reinstated for 2022. The new revamped tax credit would then be effective Jan. 1, 2023 through 2032. There is a higher $2,000 credit limit for heat pumps and biomass stoves.

The home-improvement measure is called a 25C tax credit, so-called after the section of the tax code where it launched in 2006. At that time, it was labeled a “nonbusiness energy property credit.” Now it has been rebranded as an “energy-efficient home-improvement credit.”

Mr. Barnes says the prior credit didn’t provide much incentive for homeowners to make energy-efficient investments. Roughly 1.2 million taxpayers claimed the credit in 2019, compared with 6.7 million in 2009 and 7.2 million in 2010, when it was temporarily expanded to $1,500 over the two years under the American Recovery and Investment Act of 2009.

Senate Majority Leader Chuck Schumer (D., N.Y.) speaking Sunday after the legislation was approved.

The benefit for homeowners isn’t just tax savings.

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The idea is that by making energy-efficiency improvements to their homes, taxpayers will save on energy costs, lower demand on the grid and reduce carbon emissions, says Mr. Barnes. The residential sector accounts for 21% of total U.S. energy consumption, according to the U.S. Energy Information Administration.

Some public-finance specialists say that the credits amount to a windfall for taxpayers who would have made energy-efficient home improvements anyway, and the incentive favors middle- and upper-income taxpayers. A 2018 Congressional Research Service paper showed that taxpayers with income of $200,000 and above received on average a credit that is approximately seven times the average credit received by taxpayers with income of $30,000 and below.

The energy bill provides nearly $9 billion in consumer home-energy rebates geared mostly toward lower-income households that state officials will dole out.

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The bill, which will now head to the House for approval, also makes changes to the current tax credit for installing residential solar, small wind or geothermal systems. It postpones reductions to the value of the credit and includes a credit for battery-storage systems. For those projects, taxpayers would be able to snag a 30% credit through year-end 2032, retroactive to Jan. 1, 2022.

Under the expired energy-efficient home-improvement credit reinstated for this year, the tax credit is equal to 10% of what is spent on improvements, up to the $500 lifetime cap. Under the revamped credit effective Jan. 1, the credit jumps to 30% and the limit changes to $1,200 annually. This means you could claim a 30% credit on the first $4,000 you spend on energy-efficient home improvements each year.

A credit, unlike a deduction, reduces your tax bill dollar-for-dollar. Taxpayers can’t carry over unused credits to future years. The improvements have to be made to a primary residence, not a second home.

There are still sublimits each year for certain items—$600 for some air conditioners, water heaters or boilers, $600 for windows and skylights, $250 for any exterior door, and $500 for multiple exterior doors. Given the limits, the max credit on a $4,000 window job would be $600. A homeowner could put in new windows and a new water heater in one year and get the full $1,200 credit.

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Generally, products must meet certain Energy Department energy star or International Energy Conservation Code standards.

Homeowners can also get a home energy audit, and take a credit of up to $150.

To claim the credit, taxpayers must attach IRS Form 5695, residential energy credits, to their 1040 tax return. Starting in 2025 taxpayers will have to include product identification numbers for certain items.

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