Residential incentives in the Inflation Reduction Act: What you need to know
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In a 220-189 vote on August 12, 2022, the Inflation Reduction Act of 2022 (IRA) officially passed in the House after passing in the Senate on August 9. The $700 billion bill is the shocking result of negotiations between Senate Majority Leader Chuck Schumer and West Virginia Senator Joe Manchin after the death of the Build Back Better plan in late 2021.
As the bill's name suggests, the IRA's goal is to decrease the nation's deficit and in turn, bring down inflation. The Act includes provisions for investing in domestic manufacturing, prescription drug pricing reform, and expanding the Affordable Care Act. But, it is also a historic investment in the fight against climate change.
About $369 billion from the Inflation Reduction Act (IRA) will be invested in energy security and climate change and is slated to decrease annual greenhouse gas emissions in 2030 by 1 billion metric tons. Much of the funding is allocated to clean energy industries across the board, but solar energy is one of the biggest winners.
This is the first sigh of relief the nation's solar industry let out after a rocky few years - the COVID-19 pandemic stalled installations and ongoing supply chain issues have derailed schedules and increased overall pricing. It seems that things can finally start turning around thanks to the IRA's abundant tax credits for manufacturers and homeowners alike.
One of the biggest wins for the solar industry and homeowners alike is the extension of the federal solar tax credit, now called the Clean Energy Credit. The IRA extends the tax credit until 2035 and restores the incentive amount to 30% of qualified installation costs until 2033.
Under the increased 30% rate, a $20,000 solar panel system would receive a federal tax credit of $6,000, instead of $5,200 under the previous rate of 26%.
In 2033, the tax credit will go down to 26%, and in 2034 it'll drop further to 22%. The tax credit will expire completely for residential solar installations in 2035. The new schedule for the solar tax credit is as follows:
|System installation date||Tax credit percentage|
|December 31, 2021-January 1, 2033||30%|
|December 31, 2032-January 1, 2034||26%|
|December 31, 2033-January 1, 2035||22%|
|After December 31, 2034||0%|
Before the passing of the Inflation Reduction Act, energy storage systems only qualified for the federal tax credit if they were paired with a solar energy system. Now, stand-alone energy storage systems can qualify for the tax credit. This is great news for people who don't want to deal with a noisy generator for backup power but also aren't ready to make the switch to solar.
Batteries are subject to the same incentive schedule as solar panel systems, so batteries installed before the end of 2032 will get a tax credit equal to 30% of installation costs, which then falls to 26% in 2033 and 22% in 2034, before expiring completely in 2035.
People who purchase EVs have been able to receive some form of federal incentive for over a decade. The IRA keeps the tax credit intact but changes many of the details surrounding what and who qualifies for the incentive.
To get the full $7,500 credit, the vehicle's battery must have a certain percentage of critical minerals extracted or processed in the U.S. or in a country the U.S. has a free trade agreement with. A certain percentage of battery components must also be manufactured or assembled in North America. If only one of these requirements is met, the vehicle would qualify for half of the tax credit, or $3,750.
Here are some other key changes you need to keep in mind for the EV tax credit as well, including:
The battery component and manufacturing provisions have caused a bit of concern among climate and industry leaders, as they're not sure how manufacturers will be able to meet the standards, especially when it comes to sourcing minerals. These requirements would take effect at the start of 2023.
The Act also ushers in a $4,000 tax credit for used electric vehicles. The used clean vehicle tax credit is also subject to income limits - if your joint gross income is above $150,000, or above $75,000 for single filers, you are not eligible for the tax credit.
The used clean vehicle must be purchased through a qualified sale. To be considered a qualified sale, the EV must be purchased from a dealer, cannot be more than $25,000 in price, and must be the vehicle's first ownership transfer. The vehicle model year must be two years older than the year in which the vehicle was acquired.
The Energy Efficiency Home Improvement credit expired at the end of 2021. The IRA brings the credit back to life, extending it until 2033, and bumps up the maximum tax credit amount.
Homeowners can receive a tax credit equal to 30% of qualified energy efficiency improvements during the taxable year, for a total credit up to $1,200 annually. Some of the covered improvements include installing energy-efficient exterior windows and doors, home energy audits, and installing heat pumps.
There are some limits on how much you can claim for these improvements. Energy efficient window replacements cannot receive more than $600, door replacements cannot exceed $150 per door or exceed a total of $600.
There are also rebates for homeowners who switch to electric appliances including:
The total incentive cannot exceed $14,000. In order to qualify for the incentive, the appliances or projects must be completed as part of new construction, as a replacement for non-electric appliances, or as a first-time purchase of that appliance. Like the EV tax credits, there’s also an income limit for the electric home rebate - the total household income cannot be higher than 150% of the area’s median income.
Homeowners aren't the only ones getting perks from the IRA - manufacturers are too. Of the $369 billion going towards climate initiatives, about $60 billion is exclusively for domestic clean energy manufacturing. A portion of this is going towards the Defense Production Act to expand the production of various energy-efficient technologies.
There are also multiple tax credits for manufacturers of solar panels. The majority of the solar provisions mirror what Senator Jon Ossoff put forth in the 2021 Solar Energy Manufacturing for America Act, which sought to expand manufacturing tax credits to help grow the stateside solar manufacturing industry.
These tax credits can be used for the manufacturing of solar modules, solar cells, polysilicon, back sheets, and inverters. Hanwha Solutions, a leading solar panel manufacturer, has already sparked discussions about increasing its presence in the U.S. thanks to the Inflation Reduction Act.
There are also tax credits for EV and battery manufacturing. Encouraging domestic manufacturing can hopefully alleviate future supply chain issues and eventually bring down prices not just for manufacturers, but for consumers, too.
We've covered just a tiny fraction of everything that the Inflation Reduction Act is bringing to the table.
There are some parts of the IRA we aren't crazy about, though, like the easing of oil and gas drilling restrictions. These provisions, likely included by Senator Manchin, aren't ideal, but they don't diminish what the IRA will accomplish in the fight against climate change. For every one ton of emissions estimated to be released as a result of the fossil fuel provisions of The Act, 24 tons will be reduced.
By 2030, greenhouse gas emissions are estimated to be reduced by 42% of 2005 levels thanks to the IRA, which is just shy of the Biden Administration's 2030 emissions reduction goal. But, the Administration's benchmark can still be met as individual states look to meet their climate goals.
The Inflation Reduction Act is essential to unlocking a cleaner, greener, and more affordable future. With solar as one of the star players, we're confident that the sun will continue to shine on homeowners who invest in solar panels for their homes.