How the Inflation Reduction Act Will Save Households Money in 2023
On January 1, 2023, a slate of new tax credits in the Inflation Reduction Act—also known as the climate bill—became available to U.S. households aiming to transition to cleaner energy consumption. Making these opportunities known to consumers and leveraging them to transform the country’s energy landscape will be critical to tackling climate change. Taking advantage of these credits will also yield significant cost savings for millions of Americans; create new high-paying jobs; and ensure a more secure and stable economy and environment.
The Inflation Reduction Act includes critical tax credits for households
The Inflation Reduction Act includes several credits aimed at helping households save money on major energy expenses, such as driving and home heating and cooling. The three tax credits described below may be particularly beneficial to households seeking to cut energy costs.
Previously owned clean vehicles credit
Households looking to purchase a used electric vehicle may be able to take advantage of the previously owned clean vehicles credit. The climate bill provides a credit equal to 30 percent of the sales price of a used electric vehicle, up to a maximum of $4,000. This credit will help make electric vehicles more accessible to more families. Because electric vehicles cost, on average, $800 to $1,000 less to fuel and operate per year than gas-powered vehicles, using electric vehicles can lead to serious cost savings over time.
Energy-efficient home improvement credit
Homeowners that upgrade and retrofit their home heating and cooling systems may be eligible for the energy-efficient home improvement credit. This credit is available for the installation of new doors, windows, skylights, insulation, and heat pumps that more efficiently regulate the temperature of a home. The credit may also cover the cost of a home energy audit, water heaters, and upgrades to electrical systems necessary for the installation of new electric equipment. Eligible purchases are subject to per-item credit limits that, together, may not exceed $1,200 per year. The credit limit for heat pumps is an exception and is set at $2,000 per year.
More information on eligibility requirements and accessing the credit can be found here.
Residential clean energy credit
Homeowners that install residential clean energy units may be eligible for the residential clean energy credit. This credit is available for the installation of residential solar, small-scale wind, geothermal heat pump, home battery storage, and fuel cell energy systems. Each of these installations is subject to its own set of eligibility criteria and maximum credit limits. If this credit is greater than the taxes owed by a taxpayer in a given year, the excess credit may be carried forward into the next year.
Utilizing these tax credits will yield more stable energy costs
In addition to generating annual savings, a transition to electric vehicles, renewable energy, and efficient homes can protect households against energy price spikes and hedge against inflation. International markets for oil and natural gas have seen severe volatility over the past year due to Russia’s war in Ukraine. Supply instability, combined with oil producers’ unwillingness to temporarily increase production, caused the price of gasoline to spike to near-record levels. The prices of fossil fuels will continue to be subject to unpredictable international events and global demand. On the other hand, electric vehicles, renewable energy, and electric heating, ventilation, and air conditioning system upgrades feature the vast majority of their costs upfront and do not require a volatile fossil fuel input. Households will be able to use the previously noted tax credits to reduce the upfront cost of these upgrades, resulting in consistently lower energy bills and fuel costs. Switching to a heat pump alone could save a household from $500 to $1,000 per year in heating and cooling costs, on average.
The Inflation Reduction Act promotes synergy across programs
The Inflation Reduction Act also includes many provisions designed to enhance the credits named above, with each credit benefiting directly from a least one complementary credit or program.
The energy-efficient home improvement credit and the residential clean energy credit are both complemented by the High-Efficiency Electric Home Rebates Act and Home Owner Managing Energy Savings (HOMES) Act rebate programs. These programs provide upfront rebates for the purchase of items such as heat pumps, more efficient home insulation, and residential renewable energy. In addition, contractors who perform energy-efficient home energy retrofits may also be eligible for other tax credits and rebates.
Electric vehicle owners will benefit from increased access to charging stations in the coming decade as a result of grants and tax credits for the installation of public electric vehicle charging infrastructure. To help the grid meet increased demand from more widespread adoption of electric vehicles, there are also significant credits for grid-scale renewable energy. Suppliers of components for renewable energy construction, encouraged by the renewable energy credits, will benefit from tax credits for the manufacturing of a wide variety of clean energy technologies. Many of these credits include significant credit increases for employers who meet certain prevailing wage and apprenticeship requirements. Together, these credits create a chain of incentives to produce and adopt clean energy while supporting high-paying jobs at every step.
The climate bill also includes measures to ensure that underserved or disadvantaged communities benefit from these public investments. These communities are disproportionately burdened by pollution and suffer from historic discrimination, making them more vulnerable to its effects. Similar to the prevailing wage credit increases, several credits are multiplied for projects that serve or primarily benefit disadvantaged communities. State energy offices and local development organizations are set to receive billions in funding through a variety of programs to make further investments in clean energy and energy efficiency. This includes the U.S. Environmental Protection Agency’s new $27 billion green bank, which designates at least 40 percent of its funds to benefit disadvantaged communities. Finally, states and utilities may also offer their own incentives for energy efficiency—independent of the climate bill provisions—that may also be available alongside federal incentives. However, work must still be done to guarantee that disadvantaged communities can access these benefits. The U.S. Department of Energy should prioritize outreach and technical assistance in those communities to raise awareness of these credit programs and support project development where needed.
5 Major Benefits of the Inflation Reduction Act’s Climate Investments
2023 marks the rollout of the Inflation Reduction Act’s numerous tax credits to individuals and businesses aiming to reduce their energy consumption and transition to renewable energy. These credits will lower costs for Americans by encouraging investment in cheaper, cleaner, and domestically sourced renewable energy. At the same time, they will encourage the creation of good, high-paying jobs in the U.S. clean energy industry. Finally, the equity focus of a number of tax credit programs—combined with strong outreach and technical assistance—will help to ensure that these benefits reach all communities, especially those that have been historically underserved.
The author would like to thank Shannon Baker-Branstetter, Rachel Chang, Elise Gout, Alex Thornton, and Corinne Muller for their contributions to this article.
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