Save money, reduce your carbon footprint, and enjoy a home that is more comfortable and healthy.
The Inflation Reduction Act of 2022 (IRA) is a sweeping piece of legislation that represents the largest-ever investment in renewable energy, energy efficiency, and electric vehicles (EVs) by the U.S. federal government. Americans can tap into a variety of new green energy and energy-saving incentives to save money as they lower their carbon footprint.
The IRA includes tax credits and other financial incentives to help with the cost of a renewable energy system installation, home energy upgrades, and energy-efficient appliances. It also includes EV tax credits that we discussed in this recent Earth911 guide.
Let’s take a look at some of the incentives that can help you improve the energy efficiency of your home. The following is not tax advice; please consult a tax expert to learn if you can benefit from these energy-related tax credits.
Energy Efficiency & Renewable Energy Federal Tax Credits
The Inflation Reduction Act extended the Residential Energy Efficiency Tax Credit and the Residential Renewable Energy Tax Credit through 2032. Beginning January 1, 2023, tax credits will be available on a full range of HVAC appliances and energy-efficient products and materials.
Homeowners who install eligible renewable energy systems can receive tax credits equal to 30% of the total costs, including labor for on-site preparation, assembly, electrical wiring, inverters, mounting equipment, and storage devices. For the first time, federal tax credits will be made available for standalone energy storage systems.
Tax credits are bottom-line, dollar-for-dollar subtractions on your federal 1040 tax return. When you file your annual return, you’ll need to itemize each qualified purchase on IRS Form 5695, Residential Energy Credits. You must take the tax credits the same year you purchase the eligible items.
The upper portion of the chart above lists various types of renewable energy systems that qualify for a tax credit of 30%. There is no cap on how much you spend. Let’s say you spend $30,000 to install a solar photovoltaic system. By multiplying that amount by .30 (30%), you can see your taxes are reduced by $9,000. Similarly, if you spend $60,000 on a geothermal energy system, your tax credit will be $18,000.
The bottom portion of the chart lists various types of appliances and energy improvements. Although these items also qualify for a 30% tax credit, amounts are subject to an annual cap of $1,200. As an example, if you buy a new furnace for $6,000, your 30% tax credit would be $1,800 — but capped at $1,200. It’s important to note, however, that the cap is per taxpayer. If two of you own the home, you could recoup a total of $2,400 per appliance.
Financing Incentives for Home Energy Upgrades
An energy-efficient home has a lower true cost of homeownership because construction materials are long-lasting, and high-performance appliances and systems require fewer repairs and maintenance. There are many types of energy-efficient loan programs available from Fannie Mae, Freddie Mac, FHA, VA, and Rural Housing. On such loans, qualifying rules are less strict due to the projected savings in utility costs as well as lower projected maintenance costs.
Most homebuyers allocate most of their cash to the down payment and closing costs, leaving little money left to pay for energy improvements. However, you can finance the cost of energy improvements with your mortgage. Fannie Mae’s Home Style Energy and Freddie Mac’s Green Choice program allow borrowers to finance up to 15% over the cost of the home to pay for improvements.
Let’s say you want to buy a home for $200,000, and you have $10,000 (5%) for the down payment. You’d like to complete $20,000 in energy improvements. The infographic above shows how your mortgage can be increased to cover the cost of improvements. The seller receives $200,000, and your lender disburses $20,000 to the contractor. The work can be done after you close on the house. Mortgage approval will be based on the projected increase in value as determined by the real estate appraiser. In the scenario illustrated, the homebuyer only needs an additional $1,000 in cash.
Your lender will ask you to obtain a written estimate from a licensed contractor (or solar energy installer) as well as an energy assessment such as the Home Energy Rating (HERS) from the Residential Energy Services Network (RESNET) or the U.S. Department of Energy’s Better Buildings Home Energy Score.
Energy Upgrades for a Healthier Home
Another benefit of energy-efficient homes: they’re healthier. A study completed by the International Energy Agency (IEA), Capturing the Multiple Benefits of Energy Efficiency, examined health outcomes resulting from efficiency measures completed by residential homeowners. They studied several measures that affect indoor air quality, including insulation, air sealing, heating systems, and ventilation. Every type of improvement indicated reduced symptoms of respiratory disease, and ventilation measures indicated a reduced risk of cancer, cardiovascular disease, arthritis, and depression. Due to scientific advancements in ventilation systems, an upgraded system can offer year-round protection for your family by capturing greater levels of bacteria, allergens, and airborne pollutants.
There are several HVAC upgrades designed to remove stale air and provide a continuous supply of fresh, filtered outdoor air. Whole-house air-filtering systems can defend the home from a broad range of biological pollutants such as dust, dander, pollen, bacteria, mold, mildew, and viruses. Installed next to your furnace, such systems are specific to either hot-air or hot-water systems. Every type of system will have a high-efficiency filter, such as a HEPA filter. Other types of systems include electronic and ultraviolet, which can also be inserted into ductwork. If a whole-house system isn’t feasible, consider an Energy Star certified room air purifiers.
Appliances are often certified with a Maximum Efficiency Reporting Value (MERV) rating, which provides an overall effectiveness of the appliance on a 16-point scale. Residential home products generally have a MERV rating in the 6 to 12 range. Energy Star room air cleaners also have a certification called the Clean Air Delivery Rate (CADR) which measures the amount of contaminant-free air that is delivered by the appliance. Find out more from the Association of Home Appliance Manufacturers.
If you are looking at new construction homes, many builders include a certification from the Environmental Protection Agency (EPA) called Indoor airPLUS. These homes are designed and constructed to minimize exposure to airborne pollutants and contaminants, and protect from moisture, mold, pests, combustion gases, and other pollutants. An independent third party must inspect the home for compliance with EPA standards for it to earn airPLUS certification.
Would you like to learn about the new electric vehicle tax credits? Read Understand the Tax Credits Before You Buy a New EV.
About the Author
Anna DeSimone is author of Live in a Home that Pays You Back, A Complete Guide to Net Zero and Energy-Efficient Homes, featuring a resource directory of incentives for each U.S. state and Canadian province.