There has never been a better time to make your home more energy efficient. The Inflation Reduction Act, signed into law last year, is a game changer for homeowners looking to make green home improvements and save money on utility bills. “It’s a monumental piece of tax legislation” that’s packed with tax credits and deductions, says Mark Steber, chief tax officer at Jackson Hewitt.
At the same time, the new law has “a lot for homeowners to parse through, and there are a lot of nuances for what qualifies and what doesn’t qualify for a tax break,” Steber says.
If you’re thinking of purchasing an energy-efficient appliance or system, here’s what you need to know to squeeze the most savings out of the Inflation Reduction Act, along with tips on four common green home-improvement projects.
Say farewell to lifetime limits
Until the end of 2021, homeowners could claim a credit for up to 10% of the cost of installing certain energy-efficient insulation, windows, doors, roofing and other home improvements. But the credit was capped at a modest lifetime limit of $500, with a $300 lifetime limit for windows.
That’s no longer the case. The Inflation Reduction Act’s Energy Efficient Home Improvement Credit lets homeowners — no matter their income — claim a tax credit for up to 30% of the cost of qualifying home improvements, up to $1,200 per year. (A credit is a dollar-for-dollar reduction in your tax bill.)
However, there are annual dollar limits for certain items:
- $250 per exterior door (up to $500)
- $600 for exterior windows and skylights; central air conditioners; electric panels and wiring; natural gas, propane or oil water heaters; natural gas, propane or oil furnaces; and hot water boilers
One exception: There’s a more generous yearly credit limit of $2,000 for heat-pump water heaters and heat pumps for heating and cooling your home that meet the highest “non-advanced” efficiency tier of the Consortium for Energy Efficiency (CEE).
Lisa Greene-Lewis, a CPA and tax expert at TurboTax, recommends that homeowners space out qualifying home projects over several years to reap more benefits. “If you’re thinking of installing new energy-efficient windows, consider starting with the first floor of your house, and then do the second floor the following year,” she suggests. The Energy Efficient Home Improvement Credit is valid through 2032.
Before the new law kicked in, you could take a tax credit of up to 26% of the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel-cell power to produce electricity, heat water or regulate the temperature in your home. That credit has been replaced by the Residential Clean Energy Credit, which now excludes biomass but adds battery storage and, most important, offers sweeter incentives for renewable-energy home improvements.
Under the new tax law, consumers can qualify for a clean-energy credit of up to 30% for eligible expenditures from 2022 through 2032. The credit then slides to 26% for systems installed in 2033 and 22% for systems installed in 2034, and it expires after 2034.
A 4% bump may seem small, but it can equate to big savings when you are making large-scale clean-energy improvements to your home. For example, the average cost to install a 10-kilowatt solar panel system is $29,500, according to EnergySage, a solar marketplace that connects homeowners with installers and manufacturers. For that expense, a 30% credit is $8,850, compared with $7,670 for a 26% credit.
Plus, there’s no dollar limit on the clean energy credit. So whether you shell out $20,000 or more than $100,000 on a renewable-energy system, you’ll receive a 30% credit for the full amount you spend.
The Inflation Reduction Act also extends the tax credit for installing electric-vehicle charging stations at homes through 2032, up to 30% per charger, with a maximum credit of $1,000. What’s new is that the credit now also applies to other EV charging equipment, such as bidirectional (two-way) chargers.
Take advantage of rebates
The new High-Efficiency Electric Home Rebate program, added as part of the Inflation Reduction Act, will offer nearly $9 billion in rebates to low- and middle-income families who purchase energy-efficient electric appliances.
To qualify for a rebate, your family’s total annual income must be less than 150% of the median income where you live. (You can view median income where you live using Fannie Mae’s tool (opens in new tab).) Qualifying homeowners can receive rebates for as much as:
- $840 for a stove, cooktop, range, oven or heat-pump clothes dryer
- $1,750 for a heat-pump water heater
- $8,000 for a heat pump for space heating or cooling
There will also be rebates for other upgrades, up to:
- $1,600 for insulation, air sealing and ventilation
- $2,500 for electric wiring
- $4,000 for an electric load service center upgrade
The new law’s rebate program is expected to launch later this year, says Ben Evans, federal legislative director at the U.S. Green Building Council. The rebates will be managed by each state’s energy office. “Once these programs get up and running, we’ll have more guidance around how to apply for the rebates, but we know that these rebates will be quite lucrative for a lot of people,” he says.
In the meantime, you might qualify for a rebate from the federal government or your utility company for installing an Energy Star–certified product. Go here (opens in new tab) to search for Energy Star rebates in your area.
Rewiring America, a nonprofit focused on electrifying homes, businesses and communities, offers a calculator (opens in new tab) that can give you an estimate of how much you could save through the Inflation Reduction Act’s tax incentives and rebates based on factors such as your tax filing status, zip code and household income. “The calculator can help you maximize your benefits and figure out what changes you really want to make to your home,” says Noah Goldmann, a policy analyst and tax expert at Rewiring America.
Why you should get a home energy audit
In a home energy audit, a residential energy professional assesses your home’s current energy consumption and identifies ways to make your house more energy efficient. “There are various benefits to completing a home energy audit, such as reducing energy costs on your utility bill, improving comfort levels in your home, reducing your home’s environmental impact and increasing the lifespan of your appliances and equipment,” says Rebecca Moser, an energy market specialist at Arlington, Va.’s Office of Sustainability and Environmental Management.
Another reason to get a home energy audit: The Inflation Reduction Act established a $150 tax credit for them. A home energy audit runs an average of $420, HomeAdvisor reports, with costs varying depending on a home’s square footage.
Four green projects that pay off
- Cost: $250 to $2,000 per window, according to Angi.com; hiring a contractor to install them adds an extra $200 to $800 per window.
- Tax credit: $600 annually for exterior windows and skylights.
- Potential rebate: Only if windows are part of a retrofit that achieves specific energy savings
Replacing all of the windows in your home is pricey, but the savings on your energy bills and increased comfort make it worth serious consideration. According to Angi.com, vinyl replacement windows typically range from $400 to $1,400 per window (including installation), depending on the brand, size and cost of the installation. If you choose wood frames, plan on paying $700 to $2,800. Vinyl windows cost less and require less maintenance, and the frames can be filled with insulating foam. Installation costs are higher for double- or triple-pane windows.
But installing energy-efficient windows can have a big impact on your energy bill. Heat gain and loss through windows is typically responsible for 25% to 30% of a home’s heating and cooling energy use, Energy.gov says. Look for the Energy Star label, which means that a product meets the energy-saving criteria set by the Environmental Protection Agency.
Replacing single-pane windows with Energy Star–certified windows can save you from about $100 to nearly $600 in household energy bills a year for an average-size home, according to estimates by D&R International, an environmental consulting firm.
If you don’t have the budget to replace every window in your home, Moser suggests conducting an air-leakage test around windows throughout your house. “This will help determine drafty areas in your home and where window installers need to pay greater attention,” she says. Also, if you space out the work over two or three years, you can double or triple the tax savings.
Heat-pump water heaters
- Cost: $1,200 to $3,000
- Tax credit: up to $2,000 annually for electric and some gas models
- Potential rebate: up to $1,750
Looking to nab that handsome $2,000 tax credit for installing an Energy Star–certified heat-pump water heater? You’ll also see a big reduction in your home’s energy costs, with a family of four saving an average of $470 a year on their energy bill by installing an Energy Star–certified model, with a lifetime savings of around $4,570, according to Energystar.gov. You’ll recoup your investment after less than four years.
Heat-pump water heaters are big-ticket items, though. One way to save money: Purchase the right size heater for your family. Typically, a household of four only needs a 50- or 60-gallon water heater, which can cost significantly less than a 75- or 80-gallon water heater. For example, you can save about $850 by getting a 50-gallon Voltex electric heat-pump heater instead of an 80-gallon model.
Note that heat-pump water heaters need a good bit of space — approximately the space in a 12-by-12-foot room, according to Energy Star. Also, they generate noise similar to a dehumidifier and require air filter cleaning periodically.
- Cost: $1,500 to $3,500, including installation, according to HomeAdvisor
- Tax credit: up to $1,200 annually
- Potential rebate: $1,600
For many homeowners, “insulation is out of sight and out of mind,” says Doug Anderson, home envelope product manager for the EPA’s Energy Star program. But poor attic insulation is one of the biggest culprits for home energy loss. Focusing on the attic, which tends to have greater exposure to heat, cold and moisture than other parts of the house, often makes sense.
Insulating an attic, including materials and labor, typically costs between $1,500 and $3,500, HomeAdvisor says, but costs can vary widely depending on the type of insulation you choose. Anderson says fiberglass offers the most bang for your buck.
Pro tip if you’re going to do the work yourself: “Always air seal your attic floor before adding attic insulation,” Anderson advises.
- Cost: $29,500, on average, for a 10-kilowatt system, according to EnergySage
- Tax credit: 30% of cost
- Potential rebate: none as part of Inflation Reduction Act’s rebate program
Even though a home solar roof system can cost as much as a small kitchen remodel, it can pay for itself in the long run, with the average homeowner saving anywhere between $20,000 and $97,000 over the life of their solar panel system, EnergySage says.
Nick Liberati, senior communications manager for EnergySage, breaks it down: The cost of a 10-kilowatt system priced at the national average $2.95-per-watt is $29,500. The federal tax credit allows you to deduct 30% of the cost of installing solar panels from your federal taxes, or in this case, a total of $8,850, bringing the cost to $20,650. On average, it takes 8.7 years to break even — that is, to save enough on power to recover the cost of solar panels. After that, solar energy is free until the equipment wears out.
However, some houses aren’t good candidates for solar panels. It depends on the age and condition of your roof, its orientation toward the sun, whether it’s shaded by trees and other factors. So it’s a good idea to hire a home energy specialist to help you determine whether solar roof panels make sense for your home. (Some home energy audits include a roof inspection for solar panel potential.)
For a rough idea of how much you’d save going solar, enter your address at Google Project Sunroof (opens in new tab) to see how many hours of usable sunlight your house receives each year, the recommended size of a roof solar installation for your home and the estimated energy savings over a 20-year span.