ACT tax credits help promote home energy efficiency

ACT tax credits help promote home energy efficiency

  • The Inflation Reduction Act expanded and enhanced the previous home efficiency improvement tax credit.
  • The energy efficient home improvement tax credit is worth 30% of the project cost, up to a dollar maximum.
  • The tax credit helps homeowners save money on upgrades and on future heating and cooling bills.

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Winter is almost here, which means the coldest temperatures of the year are not far away.

But homeowners can take advantage of recently passed tax credits to help make their homes more efficient, thus trapping more heat inside and better defending against the winter cold – and saving money in the process.

The energy-efficient home improvement tax credit, offered by the Inflation Reduction Act, could help defray homeowners’ costs on such projects — such as installing energy-efficient insulation, windows, doors and electric heat pumps — while also potentially reducing the amount of heating in the future, experts said. Bills. It is worth a maximum of $3,200 per year.

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The average American spends $2,000 on energy bills each year, and may “waste” $200 to $400 due to drafts, air leaks around vents and outdated heating and cooling systems, according to the U.S. Department of Energy.

The agency said that home heating represents 45% of the average person’s energy use, and water heating represents another 18%.

“You want to minimize heat loss to the outside through walls, windows, drafts, etc., and provide heat as efficiently as possible,” said Steven Nadel, executive director of the American Council for an Energy Efficiency Economy.

Improving the efficiency of homes can also reduce emissions of greenhouse gases that cause global warming, at a time when climate change is already fueling more extreme and more financially costly weather events.

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The Inflation Reduction Act, signed into law by President Joe Biden in August 2022, expanded and enhanced the advance tax credit available for home efficiency improvements.

The value of the tax exemption is 30% of the cost of eligible projects. There is a dollar cap: Taxpayers may be eligible to receive up to $3,200 per year in total. But their ability to do so depends on the number and quality of projects they implement.

Some promotions carry distinctive capital letters. For example, homeowners can get up to $500 annually to install efficient exterior doors, $600 for exterior windows and skylights, plus $1,200 for insulation and air leakage materials or systems. They can also get up to $150 for a home energy audit.

The maximum combined tax credit for these projects is $1,200 per year.

Replacing single-pane windows with Energy Star-rated double-pane windows, for example, “is like plugging actual holes in your house,” said energy and climate policy expert Cara Saul Rinaldi, president and CEO of AnnDyl Policy Group.

The EPA estimates that homeowners can save 15% on heating and cooling costs, on average, by air-sealing their homes and adding insulation in the attic, floors above crawl spaces and basement edge joists.

Some projects carry a separate annual limit of $2,000. They include: installation of electric or natural gas heat pump water heaters, electric or natural gas heat pumps, biomass stoves and biomass boilers.

In all, taxpayers can get a maximum total credit of $3,200 annually, if they combine projects worth up to $1,200 and $2,000. The IRS has published a fact sheet providing examples of the comprehensive tax relief consumers can expect for specific upgrades.

The energy-efficient home improvement credit is available through 2032. Homeowners can claim the maximum annual credit each year they make qualifying improvements, and there is no lifetime dollar limit.

“People can look ahead and plan,” Saul Rinaldi said. “Maybe they know they need to insulate their child’s room, or they need to upgrade their windows, or they want to move to cleaner fuel, but they can’t do all of that today or this year.”

Facilities must meet certain efficiency standards, as outlined by the IRS. The IRS said labor costs may not apply in some cases.

Taxpayers can only take advantage of the tax credit when they file their annual tax returns.

The tax credit is also non-refundable, which means households must incur a tax liability to take advantage of it. The IRS will not issue a refund for any tax credit value that exceeds an individual’s tax liability. The excess value cannot be carried forward to benefit from it in future tax years.

Taxpayers who want to claim the tax break on their 2023 tax returns — which most people will file early next year — have a short window to complete a qualifying project. They should be completed by the end of December. Projects only qualify after they have been “placed in service” – that is, once the project is installed and running.

Homeowners could consider doing a home energy audit by the end of December, which would qualify for a tax break and help identify future efficiency projects, Saul Rinaldi said. Homeowners can then complete those projects and claim the tax break in future years.

They may also be able to tie the tax break to energy efficiency rebate programs created by the CAA that states will soon roll out, experts said.

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