The Inflation Reduction Act of 2022 and You
September 12, 2022
What does the newly-passed Inflation Reduction Act mean for you? This bill has a lot of moving parts, so for simplicity’s sake, we are just going to focus on the provisions that directly affect individuals.
The bill creates and extends tax credits for energy efficiency while also creating direct rebates that will be administered by the states.
Let’s start with the tax credits. Tax credits are issued by the government and can be used dollar-for-dollar to reduce your federal income tax bill. If you owe no federal income tax, these credits are not refundable, so they will have no value. For those folks who owe no federal tax, the direct rebate program will be available later from the state of Louisiana.
Starting in 2023 and retroactive to 2022, 30% tax credits up to $1,200 per year will be available for eligible energy saving home improvements.
Among the easy projects are exterior doors, up to $250 per door, $600 for windows and skylights, $600 for new gas or electric hot water heaters and $2,000 for heat pumps. An important detail is that after 2023 all appliances will need a federal product identification number to qualify for the tax credits.
Our advice is to consider splitting your improvements over 2022 and 2023 to maximize your credit. To get the full $1,200 credit, you would need to spend $4,000 each year. Over two years, that would be a total of $8,000.
The other big change is what is called the residential clean energy credit. This mostly involves solar panels but includes wind, fuel cell, biomass and geothermal power generation as well. This credit is 30% of the cost of installation for a solar panel system and can include battery backup costs as well. The solar panel credit is not limited so it can be big.
Louisiana does not currently have a state credit for solar panels, but we do have a property tax freeze so that increases in property values due to solar panel installation will not increase your tax bill.
Louisiana is also in the top 20% of states in terms of solar load – a fancy way to say that the sun shines a lot here. Because of abundant sunshine and increased solar panel efficiency, solar installations can pay for themselves over time, usually over 12 to 20 years. When combined with battery backup, a solar system can be a good investment while providing hurricane resilience.
Another interesting change is the used electric vehicle tax credit. For the first time used electric vehicles are eligible for a tax credit of up to $4,000 or 30% of the cost provided that the vehicle is two years old or older and the buyer makes less than $150,000 per year.
So, these are some interesting tax law changes that should make energy efficient home improvements even more attractive.
When Louisiana develops its rebate program, we will provide details. In the meantime, a look at these provisions may encourage you to accelerate some planned home improvements.