Make the Most of EV Tax Credits, Solar Tax Credits, and More

The 2022 Inflation Reduction Act (IRA) included a bundle of new and expanded incentives intended to encourage people to buy electric vehicles (EVs) and make energy-efficient home improvements. Some of these programs could offer substantial tax credits for certain projects and will be available for the next decade.

As appealing as this all sounds, though, there are many caveats. Not everyone will qualify for every program, and it's not yet clear how some of them will work. It's also possible that initially, at least, consumers may not be able to take full advantage of certain incentives because the market simply can't supply enough qualifying products (as we'll see with the EV credits below).

What good is an incentive you can't use? It's a fair question, but these programs aren't aimed at consumers only. The IRA has a secondary goal of creating a stable market for manufacturers and contractors. If they know their customers have a decade to take advantage of these programs, they may be more inclined to roll out more products and services.

It should also go without saying that before thinking about incentives, you should be prepared to judge any major purchase or project by its financial merits. No tax credit is worth spending more money than you can afford or going deep into debt (particularly now that interest rates are so high). However, if you're already thinking about buying an EV or making your home more energy-efficient, then it's worth spending time learning about the potential benefits available.

Starting in January, taxpayers may be able to claim tax credits of up to $7,500 for purchases of either new EVs or fuel cell electric vehicles—so long as both the vehicle and the buyer meet certain criteria:

• Income limits: Buyers will have to have modified adjusted gross income (MAGI) of less than $300,000 for joint filers ($150,000 for single filers) to qualify for the credit. 
• Vehicle price caps: The manufacturer suggested retail price needs to be less than $55,000 for cars–while vans, sport utility vehicles, and pickup trucks will have to cost less than $80,000. 
• Other rules: The vehicle must have at least a 7 kilowatt-hour (kWh) battery and the "final assembly" must take place in the North America. Many EVs don't meet this standard today. To find out which vehicles may be eligible, you will eventually be able can check the Department of Energy's website. Keep in mind that the list doesn't currently reflect the rules that will take effect in January, and it will be updated as more vehicles meet eligibility requirements.

In addition, the IRA also extended the tax credit to used EVs. This credit maxes out at $4,000, or up to 30% of the vehicle price (whichever is lower), so long as certain criteria are met:

• Income limits: Buyers will have to have a MAGI of $150,000 or less for joint filers ($75,000 or less for single filers).
• Vehicle price caps: The vehicle must cost $25,000 or less and the model year must be at least two years old.
• Other rules: The vehicle must have been purchased from a dealer as defined by the IRS. 

As a reminder, tax credits aren't like a discount or manufacturer rebate, meaning you don't get the money back immediately after buying an EV. Rather, a tax credit reduces what you owe come tax day on a dollar-for-dollar basis. That said, starting in 2024, it may be possible to transfer the credit to the vendor, effectively transforming it into a buyer discount. 

The IRA increased and extended an existing tax credit for solar power installations on your home. Under this program, you may be able to claim a tax credit of 22% to 30%, depending on the year, of the overall cost of a solar installation. In addition, you may be able to include the cost of power storage batteries that have a capacity of 3 kWh or more.

There are no limits on the amount you can claim, no income limits on who can claim it, and you can carry over any unused portion of your tax credit to the next tax year—meaning you can potentially lower your tax liability two years in a row. However, you must own the system to get the tax credit, it can't be rented or leased.

You may qualify for a 30% tax credit for certain energy-efficient home improvements, such as new doors and windows, added insulation, an efficient HVAC system, and upgraded electrical panels. The credit is generally limited to $1,200 per year. And if you opt for a heat pump, heat pump water heater, biomass stove, or a biomass boiler, the annual limit rises to $2,000. Finally, you may be able to claim a $150 tax credit per household for a home energy audit.

Again, don't let a tax credit influence how much you spend on any given project. That said, energy efficiency may pay for itself over time in the form of lower utilities bills. 

Finally, because so many of the rules governing these programs are still in flux, you should consider talking with a tax professional as part of your research.