The Inflation Reduction Act, which was signed into law by President Biden in August of 2022, includes provisions that may benefit individual taxpayers.
Here Are Some of the Key Tax Breaks Under the Legislation
1. Clean Vehicle Credit
The law extends an existing tax credit of up to $7,500 if you buy a “clean vehicle,” which is defined as electric cars, plug-in hybrids, and hydrogen fuel cell vehicles. The credit will be available through 2032. However, there are some limitations:
- You qualify for the new vehicle credit if your modified adjusted gross income on your tax returns is less than $150,000 for single filers or $300,000 for joint filers.
- The credit will not be available for SUVs, vans or pick-up trucks costing more than $80,000, and other vehicles with a sticker price over $55,000.
- The Alliance for Automotive Innovation warned that many electric vehicles will be ineligible for the credit in the near term because the credit depends on where the car was manufactured and the sourcing of the battery and other parts. The goal is to accelerate domestic production and reduce our dependence on China and non-allied nations, but this is a huge undertaking that won’t happen overnight.¹
In 2024, there is a provision where you may take the above-referenced credit as a discount on the purchase price of the vehicle at time of purchase, in effect, transferring the credit to the dealer, rather than waiting to use the credit on your tax return.
Tax Tip: Due to the income limitations (see phase out numbers cited previously), if you usually have income close to the limits, work with your Financial Advisor to limit capital gains in the year you may want to buy a new car. For example, if you are close to the limit, then by limiting capital gains you will keep your income lower, and therefore, may be able to still qualify.
2. Used Clean Vehicle Credit
The law also provides for a used “clean vehicle” credit of up to $4,000 or 30% of the sales price, whichever is less. As with the new vehicle credit, there are limits:
- You qualify to receive the credit if your modified adjusted gross income is less than $150,000 for married couples and $75,000 for single filers.
- The sale price of the vehicle cannot exceed $25,000.
- When buying, you may only get the credit if it is the first time the used car was sold.
- You can also only use the credit once every three years as new used cars are purchased.
- Lastly, the car being purchased must be at least two years old or older.
Tax Tip: Modified Adjusted Gross Income (MAGI) is Adjusted Gross Income (AGI) plus tax exempt income and potentially some deductions that were taken to arrive at your AGI (such as student loan interest, IRA contributions, HSA contributions, excluded savings bond interest, and non-taxable Social Security payments).
3. Residential Clean Energy Credit
The “Residential Clean Energy Credit” extends and broadens an existing credit. The existing credit, known as the Residential Energy Efficient Property Credit, was set to expire in 2024 before getting a name change in this Act. Previously, the credit was worth 26% of the cost of installing qualifying systems. The Act would increase the amount and provides a 30% tax credit from the beginning of 2022 through 2032 for the purchase and installation of solar panels or other equipment to harness renewable energy.
The law also extends the credit to battery storage technology, which when paired with solar panels, creates a system that stores excess energy for later use.
4. Nonbusiness Energy Property Credit
The “Nonbusiness Energy Property Credit” will be available through 2032 and allows a 30% tax credit towards the installation of efficient exterior windows, doors, skylights, water heaters and other items.
- The credit is generally capped at $1,200 per year, but there are lower caps for specific items and can be up to $2,000 a year for certain projects, like electric water heaters.
- The items installed must meet certain efficiency standards or rating, which vary by item.
5. Two Cash Rebate Programs
The new law also provides for two cash rebate programs. These rebates can be used in conjunction with homeowner tax credits discussed above, so you can claim both if you qualify.
Tax Tip: These credits are non-refundable, so if you have no tax due in a given year, you will not receive the benefit of the credit
The HOMES (Homeowner Managing Energy Savings) Rebate program may apply if you replace insulation and HVAC units. You would be eligible for 50% of the cost of the projects up to a cap, which is detailed above.
- If you cut energy use by 20%, you may be eligible for a maximum of $2,000 or half the cost of replacement, whichever is less. The eligible amount would be $4,000 if the energy use reduction was at least 35%.
- If your household income is 80% or less of your area’s median income, the rebates may be double. You can look up your area’s median income on Fannie Mae’s Area Median Lookup Tool or similar programs.
The “High Efficiency Electric Home” rebate program allows a rebate of up to $14,000 if you purchase efficient electric appliances, such as water heaters, electric stoves, or clothes dryers.
- Rebates for non-appliance upgrades, like electric wiring refits, insulation, air sealing, and ventilation are also available.
- Income limits do apply. If your income is below 80% of the area median in your area, you can claim a rebate for the full cost of upgrades, up to $14,000. Households that fall between 80% and 150% of the area median income are eligible for rebates of up to 50% of the cost of the upgrades, capped at $14,000.
Both rebate programs are available if your household makes less than 150% of your area’s median income.
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1. What If No EVs Qualify for the EV Tax Credit? It Could Happen, Alliance for Automotive Innovation, August 2022
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.