The Inflation Reduction Act signed by President Biden this week aims to shift America toward a greener future by lowering the cost of electric vehicles, energy-efficient appliances and rooftop solar panels.
Many consumers will benefit. But it’s complicated — because limitations apply. You will get breaks, but most will come at tax time.
For instance, the Model Y is the only Tesla that will qualify for the next $7,500 tax credit. Why? Because the other models cost too much. Or the batteries that run the electric vehicles come from China. And there are income thresholds to qualify for the tax break.
The legislation is 730 pages of dense legalese. Many details are yet to be finalized.
We extracted the information that will be most helpful to people seeking to make climate-friendly purchases.
Electric vehicles
Buyers of new electric, plug-in hybrids and hydrogen fuel-cell vehicles will get a tax credit worth up to $7,500, depending on the battery. A rebate of $3,750 will be paid if at least 50% of battery components are produced in the U.S. or Free Trade Agreement countries, and an additional $3,750 will be paid if at least 40% of battery minerals originate in the U.S. or FTA countries. Starting in 2024, consumers can take that tax credit as a point-of-sale rebate at the dealership.
But only vehicles that cost below a certain amount will qualify. According to Kelley Blue Book, the average sticker price for a new electric vehicle in June was about $67,000 — but the new tax credit is limited to sedans, hatchbacks, wagons and other vehicles that cost less than $55,000. That rules out pricier EVs such as the Tesla Model S, BMW i4, BMW i7 or BMW iX and Hummers. For SUVs, pickup trucks and vans, the price threshold is higher, at $80,000 to get the tax break.
And there’s another wrinkle. Starting Aug. 16, the day the bill was signed, the old EV tax credit went away, and only vehicles assembled in North America are eligible for the new tax credit. That eliminates electric cars such as the BMW i4, Hyundai Ioniq 5, Kia EV6 and Kia Niro Electric, Toyota bZ4x and Toyota Mirai and Subaru Solterra. How do you learn if an electric vehicle’s final assembly occurred in North America? Enter the 17-character Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration’s VIN Decoder tool: https://vpic.nhtsa.dot.gov/decoder/.
Car buyers must meet certain income guidelines. Households with an adjusted gross income up to $300,000 will qualify for the credit. Heads of household must earn below $225,000. Individuals will qualify only with income below $150,000.
Used vehicles are also eligible for a tax credit of $4,000 or 30% of the sale price, whichever is less. The car must be at least 2 years old, cost less than $25,000 and be sold by a qualified dealer. There also are income requirements for people who seek this credit: less than $150,000 for married couples or $75,000 for single filers. As with new cars, the tax credit will be refundable at the point of sale starting in 2024.
Home heating
The Inflation Reduction Act is packed with provisions to encourage a homeowner to make energy-efficiency upgrades to their house. But the largest credits and rebates are available for purchase and installation of a specific tool: a heat pump, an efficient all-in-one heating and cooling unit that replaces a furnace and air conditioner.
As with cars, the rebates depend on your income. If your household income is less than 80% of California’s median household income — $78,672, according to the U.S. Census — you’re eligible for a nearly 100% rebate. This means, for example, that you could get $9,750 back on a $10,000 heat pump purchase. If your household income ranges from 80% to 150% of the median income, you are eligible for a 50% rebate. Households that earn more than 150% of the median income aren’t eligible.
The rebates are state-administered. Once the federal government allocates funding, each state will set up a program. The Database of State Incentives for Renewables and Efficiency tracks tax incentives and credits related to energy efficiency in all 50 states.
But beyond the rebate, you may qualify for a federal tax credit. Anyone, regardless of income, is eligible.
This tax credit is good for 30% of the total cost of your heat pump, including the cost of labor, up to $2,000. It is available for any pumps purchased this year and is good through the end of 2032.
You can also claim up to $1,350 in tax credits on other energy-efficient expenses, such as $600 for air-sealing materials or systems, $600 for required upgrades to your electrical supply, and $150 for a home energy audit, in which contractors and utility companies come into your house and tell you what needs improving.
Appliances
The Inflation Reduction Act could help save you money if you’re buying an electric range, cooktop or wall oven.
It provides only a rough framework for rebates; the exact terms will be decided by California regulators, based on how much you earn and where you live. (The rebates, which are meant to be delivered at the point of sale, are not immediately available. California must hammer out rules.)
You may be eligible for a rebate of up to $840 for an electric stove or electric heat-pump clothes dryer and up to $500 to help cover the costs of converting your supply from natural gas or propane to electric. If you need to upgrade your home’s electrical panel to support these appliances, you could get a tax credit of up to $4,000.
As with heat pumps, income requirements apply.
Home-efficiency projects
The bill offers a 30% tax credit toward the cost of installing efficient exterior windows, skylights, exterior doors and some other items.
This tax credit is worth up to $1,200 a year, though a larger $2,000 total annual credit applies to certain large projects. Some items have a cap — for example, there’s a $500 limit on new doors and $600 for windows and skylights. Installations must meet certain efficiency standards, like an Energy Star rating.
Solar panels
Homeowners could get a 30% tax credit toward the installation cost of solar panels or other tools to harness renewable energy such as wind, geothermal and biomass fuel.
That could help defray about $4,500 to $7,500 off the average $15,000 to $25,000 price tag of a residential solar electric system, according to the Center for Sustainable Energy.
It’s an improvement upon an existing 26% tax credit for home solar power installation that would have fallen to 22% next year and expired completely by 2024.
And unlike the current tax credit, it extends to battery storage technology — so homeowners that use solar power can install a battery system that stores excess renewable energy for later use.
