INFLATION REDUCTION ACT:TAX BENEFITS FOR INDIVIDUALS AND HOUSEHOLDS
The Inflation Reduction Act (IRA) of 2022 is the most ambitious climate legislation in U.S. history. It extends and expands key tax incentives that will give Pennsylvanian families the long-term certainty they need to affordably invest in clean energy, efficiency improvements, and electric vehicles (EVs).
*** INTERNAL REVENUE SERVICE (IRS) GUIDANCE IS FORTHCOMING ***
The below information does not constitute legal advice. It is an explanation of the legislation that Congress passed and President Biden signed into law on August 16, 2022 (P.L. 117-169). Federal agencies are now working to implement the law. Please check the IRS’s website for updates on implementation of IRA tax incentives: https://www.irs.gov/inflation-reduction-act-of-2022
Residential Clean Energy Credit
What the law does: Extends and expands the section 25D credit for residential energy efficiency property (the residential ITC), and rebrands it the “residential clean energy credit”
Eligible technologies:
- Solar electric
- Qualified battery storage [NEW], starting January 1, 2023
- Solar water heating
- Fuel cells
- Geothermal heat pumps
- Small wind energy
- Qualified biomass fuel property
Credit amount (as of 2023):
- 30 percent of the cost basis for the property, which generally includes the equipment, labor costs, and balance-of-system equipment, including wiring, inverters, and mounting equipment
What changed:
- The IRA extends the 30 percent credit for property placed in service from January 1, 2022 (the credit is retroactive for 2022), through December 31, 2032. The credit then phases down to 26 percent in 2033 and 22 percent in 2034
- Under previous law, the residential ITC was set at 26 percent through 2022, phasing down to 22 percent in 2023 and expiring thereafter—i.e., the IRA extends the credit for 11 years
- The IRA adds qualified battery storage technology to the list of eligible property
Resources:
- Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics (U.S. Department of Energy)
- This page includes information on how the federal ITC interacts with other incentives, such as rebates from electric utilities and state tax credits
Energy Efficient Home Improvement Credit
What the law does: Extends and expands the section 25C credit for nonbusiness energy property, and rebrands it the “energy efficient home improvement credit”
Eligible technologies:
- Energy-efficiency improvements, such as insulation, windows, and doors
- Energy property, such as electric heat pumps and central air conditioners
- Home energy audits
- Electric panel upgrades necessary for other efficiency improvements
Credit amount (as of 2023):
- 30 percent of the cost basis for the property or energy-efficiency improvement, up to an annual per-taxpayer limit of $1,200 (and a $600-per-item limit, with exceptions)
What changed:
- Under previous law, there was a 10 percent credit for qualified expenditures on a primary residence. The credit was subject to a $500-per-taxpayer lifetime limit. It expired after 2021
- The IRA:
- Revives the expired credit and extends it through December 31, 2032
- Increases the credit rate from 10 to 30 percent
- Allow expenditures on any dwelling unit used by the taxpayer—i.e., not limited to primary residences
- Replaces the $500 lifetime limit with an annual per-taxpayer limit of $1,200, with a $600-per-item limit (with some exceptions—e.g., a higher annual limit of $2,000 for heat pumps and heat pump water heaters)
Resources:
- Federal Income Tax Credits and Other Incentives for Energy Efficiency (ENERGY STAR) - [This guide will be updated by the end of 2022, pending IRS guidance]
Clean Vehicle Credit
What the law does: Amends the section 30D tax credit for plug-in EVs to apply to new clean vehicles placed into service starting January 1, 2023. The amended credit is available through December 31, 2032. All of the below listed changes to eligibility rules take effect in 2023, except for the North America final assembly requirement, which is effective immediately
Eligible technologies:
- EVs with batteries of at least 7 kilowatt hours
- Hydrogen fuel cell vehicles
Credit amount (as of 2023):
- $7,500 maximum credit if all applicable criteria are met (see below)
What changed:
- Per-manufacturer cap lifted—Under previous law, there was a cap set at 200,000 vehicles sold per manufacturer. If you were recently planning to purchase an EV from Tesla, GM, Toyota, or Ford, you were likely unable to claim a federal credit prior to enactment of the IRA
- The IRA repeals this cap for vehicles sold after December 31, 2022. In other words, although certain modifications to the credit are effective immediately (see below), the per-manufacturer cap remains in place for the rest of 2022
- North America final assembly requirement—Effective immediately, final assembly of a qualified vehicle must occur in North America
- For a list of vehicles with final assembly in North America, refer to the U.S. Department of Energy’s Alternative Fuels Data Center: https://afdc.energy.gov/laws/inflation-reduction-act
- Requirements for battery manufacturing—Starting on January 1, 2023, vehicles must satisfy two additional new requirements to receive a full credit; any vehicle that satisfies one, but not both, of the below requirements is eligible for a credit of $3,750:
- Critical minerals requirement: the applicable percentage of critical minerals contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement, or have been recycled in North America. The applicable percentage is:
- For 2023, 40 percent
- For 2024, 50 percent
- For 2025, 60 percent
- For 2026, 70 percent
- For years after 2026, 80 percent
- Battery content requirement: the applicable percentage of the components in a vehicle’s battery must be manufactured or assembled in North America. The applicable percentage is:
- For 2023, 50 percent
- For 2024 and 2025, 60 percent
- For 2026, 70 percent
- For 2027, 80 percent
- For 2028, 90 percent
- For years after 2028, 100 percent
- Critical minerals requirement: the applicable percentage of critical minerals contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement, or have been recycled in North America. The applicable percentage is:
- Restrictions on China and Russia—For calendar years 2024 and beyond, a clean vehicle may not contain any battery components which were manufactured by a foreign entity of concern (as defined in 42 U.S.C. 18741(a)(5)). Starting in 2025, a clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern
- Entities of concern include those owned by, controlled by, or subject to the jurisdiction or direction of the governments of the People’s Republic of China or the Russian Federation
- Vehicle price limits—No credit is allowed for vehicles above an applicable manufacturer’s suggested retail price (MSRP) limit, as follows:
- Vans, SUVs, and pickup trucks: $80,000
- Any other vehicle: $55,000
- Income limits—The credit is not allowed for taxpayers with modified adjusted gross income (MAGI) as exceeds:
- $300,000 for married couples filing jointly
- $225,000 for single heads of household
- $150,000 for single filers or any other case
- For a given taxable year, the taxpayer may use MAGI for that year or the immediately preceding year, whichever is lower
- Availability as a rebate starting in 2024—For vehicles sold after December 31, 2023, the credit is available as a point-of-sale rebate:
- A taxpayer may elect to transfer the credit to the vehicle dealer, provided the dealer is registered as an eligible entity and discloses the MSRP, credit amount, associated fees, and amount to be paid to the taxpayer in the form of a down payment or otherwise
- Treasury will establish a program to make advance payments to any eligible dealer equal to the cumulative amount of transferred credits
- Until 2024, consumers can continue to claim the credit on their annual tax filing
Resources:
- Frequently Asked Questions on the Inflation Reduction Act’s Initial Changes to the Electric Vehicle Tax Credit (U.S. Department of Treasury)
- This document includes information for consumers who signed a contract to purchase an EV prior to enactment of the IRA, but have not yet taken possession of the vehicle.
- The U.S. Department of Treasury is encouraging vehicle buyers to enter their vehicle identification number (VIN) into a “VIN decoder” operated by the U.S. Department of Transportation (DOT) prior to purchase. This is the best way to ensure a vehicle is eligible for a tax credit. The DOT website is the final determination on a vehicle’s eligibility, as different model years and trims will sometimes have different assembly locations that could impact eligibility
- Visit: https://www.nhtsa.gov/vin-decoder (National Highway Traffic Safety Administration)
- Electric Vehicles with Final Assembly in North America (U.S. Department of Energy)
Credit For Previously-Owned Clean Vehicles
What the law does: Creates a new credit for used EVs and fuel cell vehicles (section 25E)
Eligible technologies:
- To qualify for this credit, used EVs must generally:
- Meet the eligibility requirements in the existing section 30D credit for new clean vehicles (new restrictions for the 30D credit, outlined above, do not apply to the 25E credit for previously-owned vehicles)
- Not exceed a sale price of $25,000
- Be a model year that is at least two years earlier than the date of sale
- Weigh less than 14,000 pounds
Credit amount (as of 2023):
- The lesser of $4,000 or 30 percent of the sale price
What changed:
- This is a new credit
- Income limits—The credit is not allowed for taxpayers with MAGI as exceeds:
- $150,000 for married couples filing jointly
- $112,500 for single heads of household
- $75,000 in any other case
- For a given taxable year, the taxpayer may use MAGI for that year or the immediately preceding year, whichever is lower
- Not available for resale by the buyer—Buyers must purchase the vehicle from a dealership for personal use and cannot claim the credit more than once every three years. The credit only applies to the first resale of a used EV, and includes restrictions on sales between related parties
- Availability as a rebate starting in 2024—For vehicles sold after December 31, 2023, the credit is available as a point-of-sale rebate:
- The credit may be transferred to the used vehicle’s seller (provided the dealer meets registration, disclosure, and other requirements), to allow the purchaser to access the credit value at the point of sale
Resources:
- Official resources on this tax credit are not yet available. Please refer to the IRS website for the latest updates and guidance
