You may be able to benefit from enhanced residential energy credits as a result The Inflation Reduction Act of 2022.
Energy Efficient Home Improvement Credits
Building envelope components and energy property qualify:
- Exterior doors (30% of costs up to $250 per door)
- Exterior windows or skylights (30% of costs up to $600)
- Insulation materials (30% of costs)
- Residential energy property like air conditioners and water heaters (30% of cost up to $600 per item)
Simply buying a replacement water heater or AC unit does not qualify for the credit. Energy efficiency requirements must be met. Doors and windows must meet Applicable Energy Star Requirements. Central air conditioners (split systems) equipment with SEER2 greater than or equal to 16 are eligible
After 2022, there is no longer a lifetime ceiling on the credits but the annual credit limit is generally $1,200 for building envelope components, energy property and home energy audits. However, qualified heat pumps, biomass stoves or boilers may qualify for a $2,000 credit so the maximum total yearly energy efficient home improvement credit amount may be up to $3,200.
So, with planning you might be able to spread improvements over more than one year to maximize the credit.
Let’s say your air conditioning unit (three ton) must be replaced. Depending on the size of your home there may be more than one unit. A 3 ton unit will cool 1,500 to 2,000 square feet. Your choice is between a 14 SEER unit (no tax credit) and a 16 SEER unit that qualifies for a $600 federal tax credit. The cost difference between the units is $2,750.
A federal tax credit is a dollar-for-dollar reduction of tax – like withholding, so if you buy the 16 SEER unit the credit knocks $600 off the difference leaving a balance of $2150. A 16 SEER unit is 13% more efficient than a 14 SEER and projects to save about $160 annually in energy costs. It will take approximately take 13.5 years to break even on the additional cost.
Keep in mind the projected savings are an estimate and would depend on a number of factors and ignores any future increase in electricity prices. But you can apply this type of analysis to any replacement purchase subject to the credit.
Clean Energy Credits
Tax credits available for clean energy additions – solar, wind, geothermal and similar clean energy additions. The credit is 30% of the cost.
For a deeper dive, link to the attached IRS Fact Sheet. https://www.irs.gov/pub/taxpros/fs-2022-40.pdf
Here is a link to Energy Star requirements by type of improvement.