How fresh tax credits, rebates can launch eco home updates

If you’ve been holding off on home improvements, a new law signed last year and now in effect as of Jan. 1, 2023, may provide a fresh incentive.

The Inflation Reduction Act, or IRA, includes tax credits and rebates for homeowners who make energy-saving updates to their homes. Credits for improvements like new solar panels, windows, doors and air conditioners are available now, while rebates for larger energy-efficient updates are expected to become available later this year or next year.

Here’s what to know about these perks, plus tips to plan your projects.

TAX CREDITS FOR SMALLER

UPDATES

The IRA includes tax credits for around-the-house eco-friendly updates. Eligible purchases include energy-efficient windows, doors, insulation, central air conditioners and home energy audits. An IRS fact sheet outlines eligible home improvements.

Tax credits reduce your tax liability for the year, says Los Angeles-based certified public accountant Michael DiBernardo. For example, a $500 credit lowers your taxes owed by $500.

The IRA allows homeowners a 30% tax credit for some energy-efficient updates, capped at $1,200 per year. There’s also a $2,000 credit for heat pumps, heat pump water heaters and biomass stoves.

Combining projects — like new insulation and a heat pump — can get you up to $3,200, says Kara Saul Rinaldi, president and CEO of the energy and environmental strategy firm AnnDyl Policy Group and an advocate of policies that helped shape the IRA.

Keep receipts for each eligible update and add them to your tax forms, Rinaldi says.

INCREASED CREDITS FOR SOLAR PANELS

The IRA also increased the credit for solar installations. Homeowners can get a tax credit for 30% of the cost to buy and install solar panels — up from the previous 26%. And there’s no dollar limit. If you pay $15,000 to put solar panels on your house, you can claim a $4,500 tax credit.

Any unused credit carries to future years, so if you don’t owe taxes this year, you can use it later.

The tax credit will reduce the cost of going solar, but if your goal is to lower your utility bill, first determine when you’ll see savings.

The average payback period for solar panels is six to nine years, according to the Center for Sustainable Energy, a policy and research firm.

REBATES TO GENERATE BIG SAVINGS — EVENTUALLY

The “difference makers” in the IRA are two new rebates, Knickerbocker says. One program offers up to $8,000 for lowering the home’s energy use and the other provides up to $14,000 for electrification updates like appliances and breaker box upgrades.

Unlike the credits, the rebates are designed to be offered at the point of sale.

Low- to moderate-income households — defined in the IRA as those with total annual incomes of less than 80% of their surrounding area’s median — are eligible for larger rebates than those with higher incomes.

Even if you don’t usually owe taxes and can’t use the IRA credits, the rebates mean you can still get a discount on energy-efficient updates, Saul Rinaldi says.

It’ll be months, at least, before homeowners can get the rebates. In the meantime, consider a home energy audit to determine which projects to start once the rebates are available.