Inflation Reduction Act – Clean Vehicle and Energy Tax Credits

The Inflation Reduction Act (IRA) of 2022 changed a wide range of new and reinstated tax laws that affect individuals and businesses, including a number of credits and deductions. Below are two provisions to consider for the upcoming tax filing season and beyond.

Clean Vehicle Tax Credits

The IRA altered the requirements for the clean vehicle tax credit, particularly for electric vehicles, including fuel cell vehicles. The credit is available for eligible commercial clean vehicles in addition to vehicles that were previously owned.

The electric vehicle tax credit, or the EV credit, is a nonrefundable tax credit offered to taxpayers who purchase qualifying electric vehicles or plug-in hybrid vehicles. Nonrefundable tax credits lower your tax liability by the corresponding credit amount. This means the credit can make a sizable dent in your tax bill, but you won’t see any overage back in the form of a tax refund.

The tax credit can reach upward of $7,500. The credit starts with a base value of $2,500 and increases by a total of $417 per kilowatt hour beyond five kilowatt hours, with up to $5,000 in addition to the base amount of $2,500. On average, the minimum clean vehicle tax credit is valued at $3,751 and applies to vehicles with a battery capacity of seven kilowatt hours at a minimum.

Determine whether your purchase of an electric vehicle (EV) or fuel cell vehicle (FCV) qualifies for a tax credit on the EV Tax Credit Eligibility flowchart or visit the Clean Vehicle Tax Credits webpage on the IRS website.

EV Tax Credit Eligibility Flowchart

Home Energy Tax Credits

If you make energy improvements to your home, tax credits are available for a portion of qualifying expenses. The credit amounts and types of qualifying expenses were expanded by the Inflation Reduction Act of 2022.

If you make eligible energy-efficient improvements to your home on or after January 1, 2023, you may qualify for a tax credit up to $3,200. You can claim the credit for improvements made through 2032.

The credit equals 30% of certain qualified expenses for energy improvements to a home located in the United States, including:

  • Qualified energy-efficient improvements installed during the year,
  • Residential “energy property” expenses, and
  • Home energy audits.

There are limits on the allowable annual credit and on the amount of credit for certain types of expenses.

The maximum credit you can claim each year is:

  • $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600 total) and home energy audits ($150), as well as
  • $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

In addition to windows and doors, other energy property includes central air conditioners and hot water heaters.

Before the 2022 law was enacted, there was a $500 lifetime credit limit. Now, the credit has no lifetime dollar limit. You can claim the maximum annual amount every year that you make eligible improvements until 2033. For example, you can make some improvements this year and take a $1,200 credit for 2023 — and then make more improvements next year and claim another $1,200 credit for 2024.

The credit is claimed in the year in which the installation is completed.

Other limits and rules

In general, the credit is available for your main home, although certain improvements made to second homes may qualify. If a property is used exclusively for business, you can’t claim the credit. If your home is used partly for business, the credit amount varies. For business use up to 20%, you can claim a full credit. But if you use more than 20% of your home for business, you only get a partial credit.

Although the credit is available for certain water heating equipment, you can’t claim it for equipment that’s used to heat a swimming pool or hot tub.

The credit is nonrefundable. That means you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years. However, there’s no phaseout based on your income, so even high-income taxpayers can claim the credit.

Contact us if you have questions about making energy-efficient improvements or purchasing energy-saving property for your home. Below is a printable table to review all the energy tax credits available.

Energy Tax Credits

The Inflation Reduction Act may have other tax breaks you can benefit from for making clean energy purchases. Contact your CDS experts at (888) 388-1040 and we can help ensure you get the maximum tax savings for your expenditures.