2023 energy tax credit: how to get a break on an electric vehicle, heat pump, and more

On January 1, Americans became eligible to save thousands of dollars when they bought electric cars, induction stoves, and modern appliances under the Inflation Reduction Act that Democrats passed last fall.

Most homes in America still use fossil fuels, especially natural gas, for heating, cooking, and hot water. To meet the Biden administration’s goal of reducing the climate footprint of buildings by half by 2032, many of these homes will need to be electrified. Replacing gas stoves for induction and natural gas furnaces for electric heat pumps plugs the building more fully into the electrical grid. Today, the grid may be powered by some coal and gas, but a few years from now, it will run on clean energy like wind and solar. Home electrification is now key to reducing US carbon pollution in the coming decades.

A major part of the new $369 billion climate initiative law is rebates and tax credits aimed at helping consumers switch from fossil fuels to electricity. While the IRA also includes large payments to utilities and manufacturers to boost the domestic clean economy, consumer incentives address a different set of problems – rising energy bills, and tackling the most stubborn sources of greenhouse gas pollution.

There is money for rooftop solar; electric vehicles, clothes dryers, stoves, and ovens; heat pumps for heating, cooling, and hot water; electrical panel and wiring. The law also includes programs that cover the cost of insulation and weatherization to reduce the energy use of buildings.

Not everyone will have to replace their furnace, car, or stove in 2023. But even if you don’t plan to, or don’t own a home, there are ways you can apply for IRA incentives, and it’s important to start thinking about them early to take full advantage.

Home renovations are a big investment and difficult to get right. The worst case scenario is to find a broken system and long waiting times for contractors, let alone the latest in available technology. That’s why if you’re going to make one goal for 2023, be sure to evaluate what you have and what you need.

“Embrace the notion that electrification is what we all need to do eventually,” said Craig Aaker of Green Savers, an Oregon-based home performance contractor. There’s no point in upgrading the furnace, other than switching to a heat pump, he added: “At this point, I’m definitely not going to spend money on fixing the furnace if it comes out. Just take the money and make it an investment.”

The best place to start is with an energy audit, which identifies where your home is inefficient, problem areas like drafty windows, and any improvements that can lower your energy bill and make you more comfortable. A professional will run around $150 (although the Department of Energy has a guide for DIY options). Not all suggestions are expensive upgrades, and are probably in one of the categories of improvements eligible for tax exemption.

“The good thing about the Inflation Reduction Act is that it effectively creates an electricity bank account for every household in America that can be accessed when the time is right,” said Ari Matusiak, CEO of the electrification advocacy group Rewiring America.

Only a few tax credits are available in 2023

There are two main incentive buckets available – tax credits that can be redeemed when you file your taxes the following year, and rebates that reduce the cost of installation and machinery upfront.

The tax credit would last until 2032 with no spending limits, which could not be dramatically repealed by the next Congress. Some funding for rebates is set aside for low- and middle-income earners, who earn between 80 and 150 percent of the area’s median income, and have limits on spending, so the law could run out of money before the 10 years are up. .

Some rebates may not kick in until later in 2023, as states must set up their own programs and guidelines for who is eligible. For low-income people who make less than 80 percent of the area income, the rebate will cover most, if not all, of the technology and installation costs. Middle-income earners, who earn between 80 and 150 percent of the region’s income, will get a share of the cost. The rebate will be an initial discount, offered at the time of sale.

More information about rebates will come in 2023. Currently, tax credits are available, and they can be a bit complicated. Some are limited based on expenditure and income levels, or, like the 25C tax credit, apply to multiple categories.

If you want to dig into this tax break further, the Rewiring America guide is useful, and the White House has a website dedicated to unpacking the IRA. Another page to bookmark is the IRS guide, which will be updated throughout the year.

Here are some technologies you may want to consider upgrading or replacing, taking advantage of tax credits available January 1 through IRAs:

breaker box

The electrical panel, or breaker box, is the foundation of the electricity that flows into your home. Panel size is important if you plan to add a ton of new plug-in devices, as older homes may have smaller capacities.

The tax credit covers 30 percent of panel upgrades, capped at a $600 reset per year (this is not capped if paired with a rooftop solar installation).

Solar roof

In the long run, rooftop solar can reduce bills by hundreds of dollars per year, and serve as a backup power source during storms when paired with battery storage. It is also electricity that does not contribute to the climate crisis.

The tax credit will cover 30 percent of the cost of installing rooftop solar. Rewiring America estimates that the average 6kW rooftop solar installation is about $19,000, so the average tax credit is about $4,700.

Heat pumps for heating, air conditioning, and water heaters

Heat pumps are up to four times more efficient than the best gas furnaces, because they direct cold air from one area to another. The technology is relatively unknown in the US compared to Europe, but it is making progress.

There are several different types of heat pumps, the best to consider if you currently rely on gas for your clothes dryer, air conditioner, heater, or hot water.

The tax credit covers 30 percent of the cost of heat pumps for air and water, limited to $2,000 per year, but resets each year to be used for other projects.

Aaker, Green Savers, explains that you should consider what you already have for water heating. “If you have a natural gas or resistance electric water heater, which are the two most common types, you can save real money. The thing we sell that has the highest payoff is the heat pump water heater.

Weatherization and insulation

By sealing doors and windows, and adding insulation, a home can become more comfortable to live in and require less money to heat and cool. The first step to finding out what your space needs is to get an energy audit done by a professional, who evaluates what type of insulation and sealing is most beneficial. The IRA offers a 30 percent tax credit for energy audits, and upgrades for insulation, doors, and windows.

Home battery system

Battery storage can help electrical appliances at home, even when there are major outages. The tax credit for this is not closed, offering 30 percent more for battery storage. The average cost is $16,000, so the average loan sends $4,800.

Electric vehicles

If you earn less than $112,500, or less than $150,000 for joint filers, there are two tax credits that qualify for both new and used EVs. For vehicles under $55,000 and vans and SUVs under $80,000, consumers can get a $7,500 discount. If you buy a used EV, you can get a discount of up to $4,000. The Department of Energy has a preliminary list of qualifying cars here .

In 2024, these credits will change to upfront discounts given by merchants at the point of sale.

Additional rebates are available later in 2023

There will be more rebates available for all the above categories, targeting lower and moderate income levels, later in 2023. There will also be additional categories that will get rebates, including induction stoves, ovens, and clothes dryers.