Inflation Act includes big changes in energy-related tax credits for homeowners and car buyers

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Homeowners and car buyers can expect some big changes in energy-related tax credits that are part of the recently passed Inflation Reduction Act of 2022.

Tax credits for homeowners

The Inflation Reduction Act revived and modified two energy-related credits for homeowners:

• The existing Nonbusiness Energy Property Credit was revived for 2022, and restructured as the Energy Efficiency Home Improvement Credit beginning in 2023.
• The existing Residential Energy Efficient Property Credit was renamed and slightly modified as the Residential Clean Energy Credit.

Nonbusiness Energy Property Credit revived for 2022

Homeowners may be able to claim the Nonbusiness Energy Property Credit for energy efficiency improvements and energy property expenditures they make during 2022. This credit had largely expired at the end of 2021, but the Inflation Reduction Act reactivated it for 2022. 

• Energy efficiency improvements are building envelope components, such as insulation materials, certain metal roofs, and exterior windows and doors. 
• Qualified energy property includes heat pumps, air conditioners, heaters, and biomass stoves. 

A homeowner’s total lifetime credit is limited to $500. The annual credit for particular types of property is also limited.

Energy Efficient Home Improvement Credit replaces Nonbusiness Energy Property Credit

Starting in 2023, the Nonbusiness Energy Property Credit is restructured as the Energy Efficient Home Improvement Credit. This credit is generally equal to 30% of:

1. A homeowner’s qualified energy efficiency improvement costs,
2. Residential energy property expenditures for qualified energy property, even if the taxpayer does not own the home, and 
3. A homeowner’s home energy audit costs.

The credit no longer has a lifetime limit, but limits apply to the annual credit and to the credits for particular types of property.

Qualified expenses for the new Energy Efficient Home Improvement Credit and the old Nonbusiness Energy Property Credit are similar, but not identical. 

Residential Clean Energy Credit replaces Residential Energy Efficient Property Credit TPSO information reporting threshold

Less extensive changes apply to the existing Residential Energy Efficient Property Credit, which is renamed the “Residential Clean Energy Credit.” The 2022 credit applies to expenditures for solar, fuel cell, wind energy and geothermal heat pumps. After 2022, the credit rate increases, and the credit is extended to battery storage technology.

Tax credits for car buyers

The Inflation Reduction Act makes a big immediate change to the existing credit for new electric vehicles. For 2023, the credit is also renamed and restructured, and a new credit applies to used electric vehicles.

Plug-in electric vehicles must be assembled in North America

The existing Plug-In Electric Drive Vehicle Credit no longer applies to a vehicle purchased after August 16, 2022, unless:

• the final assembly of the vehicle occurred in North America, or
• before August 16, 2022, the taxpayer entered into a binding written contract to buy the vehicle.

The Department of Energy has a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet this final assembly requirement. However, since some models are built in multiple locations, taxpayers should use the VIN Decoder website from the National Highway Traffic Safety Administration to determine the actual manufacturing location for a particular vehicle.

Clean Vehicle Credits replace Plug-In Electric Drive Vehicle Credit

After 2022, the existing Plug-In Electric Drive Vehicle Credit is restructured as the New Clean Vehicle Credit. Like the existing credit for electric vehicles, the maximum New Clean Vehicle Credit is $7,500. 

However, in many ways, the post-2022 New Clean Vehicle Credit is more restrictive than the credit it replaces. 

1. The New Clean Vehicle credit does not apply to higher-income taxpayers. 
2. The New Clean Vehicle credit does not apply to higher-priced vehicles.
3. For the maximum New Clean Vehicle Credit, the vehicle must satisfy domestic content and manufacturing requirements.

On the other hand, a new feature of the Clean Vehicle Credit extends its reach to car buyers who do not want to wait for a tax credit to recoup their vehicle costs. Beginning in 2024, a car buyer may transfer the credit to the seller. This allows the dealer to use the credit as a price reduction, down payment, or cash rebate.

Used Clean Vehicle Credit available for the first time

In addition to the restructured New Clean Vehicle Credit, a brand new credit of up to $4,000 is available for individuals who buy used clean vehicles after 2022. Both clean (electric) vehicles and fuel cell vehicles may qualify for the Previously Owned Clean Vehicle Credit. 

As with the New Clean Vehicle Credit, higher-income buyers and higher-price vehicles are not eligible for the credit; and, after 2023, the buyer may be able to transfer the credit to the seller.

Alternative Fuel Vehicle Refueling Credit extended and modified 

Finally, the existing Alternative Fuel Vehicle Refueling Property Credit, which had expired at the end of 2021 is revived for 2022. However, after 2022, the credit applies only to property in low-income census tracts and nonurban areas. Credit rates and limits for depreciable (business) property are also changed.