F.A.Q – Inflation Reduction Act of 2022

UPDATED JANUARY 18, 2023

The Inflation Reduction Act (IRA) is packed with provisions to incentivize homeowners to make energy-efficiency upgrades to their home, including installing high-efficiency heating, cooling, and water-heating equipment. In fact, there are so many good things in this bill that it’s a bit tough to tease them all out and to determine what may be a homeowner’s best path forward. Alaska Heat Smart has compiled the following questions and answers that will hopefully lead you down a path to savings, reduced emissions, and a warmer, drier, and more comfortable home.

In short, tax credits can be taken this year. Rebates may be up to at least one year away.

We’ve organized our questions and answers into two sections, one for tax credits and one for rebates. We’ll be monitoring these questions and our answers closely over the next few weeks and months, making changes and updates as needed. Details continue to emerge about these new programs and the information below is both to the best of our knowledge and subject to change. Be sure to check this page for updates and we strongly urge consultation with an accountant come tax time.

Tax Credits: no income limits / must have tax liability

What are the differences between the tax credits and the upfront rebates?

The IRA offers benefits from both tax credits and rebates. Tax credits apply to certain expenses, such as the purchase of a heat pump or a new or used electric vehicle. Generally speaking, tax credits help to offset a tax balance due – meaning you can deduct the amount of the credit from your tax liability. Conversely, if you have lower income and owe no taxes, you’ll see no benefit from a credit. IRA rebates on the other hand will be payments, possibly not available until late 2023 or sometime into 2024, that the federal government will make to you, presumably through a state or local agency, giving back a portion of the money that you have already spent on your energy efficiency upgrades or improvements. NOTE: There is discussion at the federal level of the need to make the rebates ‘at the point of sale’. This would make the rebates act more like incentives, meaning that you would not have to have the money up front in order to receive the rebate. It would be deducted from your original bill.

What home improvements are eligible for the Energy Efficient Home Improvement Credit, and how much is the credit?

Building envelope components satisfying specified energy efficiency requirements:

• exterior doors (30% of costs up to $250 per door, up to a total of $500)
• exterior windows and skylights (30% of costs up to $600)
• insulation materials or systems and air sealing materials or systems (30% of costs)

Home energy audits (30% of costs up to $150). 

Residential energy property (30% of costs, including labor, up to $600 for each item) satisfying specified energy efficiency requirements

• central air conditioners
• natural gas, propane, or oil water heaters
• natural gas, propane, or oil furnaces and hot water boilers
• improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property listed in these FAQs and enable its installation and use. It is our understanding that this credit does not include the work needed to run a circuit and disconnect for a new heat pump.

• Heat pumps and biomass stoves and biomass boilers (30% of costs, including labor) satisfying specified energy efficiency requirements

• electric or natural gas heat pump water heaters
• electric or natural gas heat pumps
• biomass stoves and biomass boilers. 

What energy efficiency requirements must be met to qualify for the Energy Efficient Home Improvement Credit?

The following energy efficiency requirements must be met to qualify for the Energy Efficient Home Improvement Credit:

  • Exterior doors: must meet applicable Energy Star requirements.
  • Windows and skylights: must meet Energy Star most efficient certification requirements.
  • Insulation materials or systems and air sealing materials or systems: must meet the criteria established by the
    International Energy Conservation Code (IECC) standard in effect at the start of the year that is two years prior
    to the year the materials or systems are placed in service. For example, materials or systems placed in service in
    2025 must meet the criteria established by the IECC standard in effect on January 1, 2023, to qualify for the
    Energy Efficient Home Improvement Credit in 2025.
  • Electric or natural gas heat pumps, electric or natural gas heat pump water heaters, central air conditioners,
    natural gas or propane or oil water heaters, natural gas or propane or oil furnaces or hot water boilers: must
    meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for
    Energy Efficiency (CEE) that is in effect as of the beginning of the year in which the property is placed in service.
    See also the CEE Directory of Efficient Equipment for a searchable database of qualifying equipment.
  • Oil furnaces or hot water boilers can alternately qualify if they (1) meet or exceed 2021 Energy Star efficiency
    criteria and are rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which
    consists of an eligible fuel; or (2) if placed in service after December 31, 2026, achieves an annual fuel efficiency
    rate of not less than 90 and is rated by the manufacturer for use with fuel blends at least 50 percent of which
    consists of an eligible fuel.
  • Biomass stove or biomass boilers: must have a thermal efficiency rating of at least 75% (measured by the higher
    heating value of the fuel).
  • Panelboards, sub-panelboards, branch circuits, or feeders: must be installed according to the National Electric
    Code and have a load capacity of 200 amps or greater.
Should I buy a heat pump now and claim the tax credit or should I wait for the rebate program?

The correct answer to this question is home-specific and personal. A 30% of total heat pump project cost, capped at $2,000, is presently available. If your home is extremely oil thirsty, and you anticipate using a great deal of oil from now until the new year, it may be a wash. $1700 will buy 340 gallons of home heating diesel at today’s average price of $5 / gallon. In this case, you need your heat pump now. And, it is unknown just when a state rebate program will go live. Our best guess is early 2024.

Another consideration is the simple fact that many homeowners, if qualified, will want to take advantage of a rebate program. A rush on heat pump installations and electrical upgrades is likely once a rebate program begins. Contractor capacity is already strained and installations can require up to a three month wait before completion. Winter weather slows the process even more.

I purchased a heat pump prior to August 16, 2022. Can I take a tax credit for this expenditure?

The earlier credit that applied to heat pumps has been revived for the 2022 tax year, and the pre-expiration rules and limits apply. So, yes, you can take a tax credit for the purchase of a heat pump prior to August 16, but it will be limited to $300. This $300 credit appears to apply to all of 2022, not just installations that took place before the act was signed on August 16. Your tax credit can be taken either on your 2023 1040 ($300) or on your 2024 1040 ($2,000) depending on when you have the heat pump installed.

As of January 1 of 2023, the credit is equal to 30% of the costs of all eligible home improvements made during the year. This updated 2023 credit has a ceiling of $1,200 per year in total, BUT the bill allows an additional credit of $2,000 to be taken for heat pump water heaters and heat pumps. Read more in this article in Politico. Therefore, if you install a heat pump after 1.1.23, you will be eligible for a tax credit for the pump equal to 30% of the cost up to $2,000, as well as a maximum of $1,200 for other measures taken.

What if I want to install a heat pump soon and I don’t have enough money on hand to cover the necessary up front cost?

Alaska Heat Smart and the True North Federal Credit Union have partnered to create a low interest heat pump loan. If you complete a AK Heat Smart home heat pump assessment, and you qualify for the loan, you can borrow up to $12,500 at a 4-6% interest rate. For example, if you were to receive a five-year loan for $7,500 at 4%, your monthly interest payments would only be $13.

Are non-profit businesses eligible for Inflation Reduction Act tax credits?

The majority of non-profit businesses are tax exempt and do not pay annual federal taxes. There are informational filings that are required, but they are not a true tax return. These credits will not be available to non profits.

30% of the total cost of my upgrades and energy efficiency improvements that I plan in 2023 will result in a total tax credit that is above the $1,200 credit cap (additional $2,000 for a heat pump). Can I spread out the 30% over a number of tax years?

Yes, in this case you can take the maximum $1,200 tax credit ($3,200 including a heat pump) when you file your 2023 taxes in 2024. And, you can use the remainder of the 30% total over the next tax year or two. According to an article in Politico, the credits for heat pumps or biomass stoves and boilers are in addition to the $1,200 annual limit for the home energy efficiency tax credit. Check with your accountant for the specific forms that will be required to account for these credits if you may need to spread them over multiple tax filings.

Does replacing an oil boiler with an electric boiler qualify for a tax credit?

We’re still seeking the answer to this question! It would seem likely, but we have yet to find mention of electric boilers in any of the bill’s language. We have found the following here, but the bolded wording is unclear in its exact meaning:

$600 for exterior windows and skylights; central air conditioners; electric breaker panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and $2,000 for electric heat pump water heaters, electric heat pumps, and boilers (for this one category, the $1,200 annual limit may be exceeded).

What type of residence qualifies for these credits? For example, are the credits available for improvements made to a second home or to a home rented by the taxpayer?

The credits are available only for certain improvements made to second homes, and the credits are never available when the improvements are made to homes not used as a residence by the taxpayer. For example, landlords can never use these credits for improvements made to any homes they rent out but do not use as a residence themselves. However, if a taxpayer is renting a home as their principal residence and makes eligible improvements, a tax credit may be available to such tenant.

For the Energy Efficient Home Improvement Credit, the following requirements apply:

  • exterior doors, windows and skylights, insulation materials or systems, and air sealing materials or systems: the home must be located in the United States and must be owned and used by the taxpayer as the taxpayer’s principal residence
  • central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; and improvements to panelboards, sub-panelboards, branch circuits, or feeders: the home must be located in the United States and used as a residence by the taxpayer (includes renters)
  • home energy audits: the home must be located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence (includes renters).
Can a taxpayer claim the credits for expenditures incurred for an existing home? What about a newly constructed home?

The rules vary by credit.

For the Energy Efficient Home Improvement Credit, the following requirements apply:

  • Under the Energy Efficient Home Improvement Credit a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, and not for a newly constructed home.
  • Under the Residential Clean Energy Property Credit a taxpayer can claim the credit for qualifying expenditures incurred for either an existing home or a newly constructed home.
If I receive an incentive from Alaska Heat Smart’s Clean Heat Incentive Program (CHIP), or some other incentive program, such as a utility rebate or Native Corporation rebate, am I still eligible for a heat pump tax credit?

Yes! AHS incentives and other program’s rebates will not fully cover the cost of your heat pump project. You will have to pay some amount of money in order to complete the purchase and installation. It is this expenditure that you can apply towards a potential tax credit. According to last year’s tax form 5685 (Residential Energy Credits): Subsidized energy financing. Any amounts provided for by subsidized energy financing can’t be used to figure the nonbusiness energy property credit. This is financing provided under a federal, state, or local program, the principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

This tells us that if you receive an AHS incentive of $3,000 and your heat pump project comes to a total cost of $6,500, you can claim a cost of $3,500 for the project. 30% of $3,500 is $1,050. This is the amount of credit you can claim for the heat pump. The credit is good for 30% of the total that you spend, up to an expenditure of $2,000.

Rebates: income qualified

When will rebates become available?

Perhaps by fall 2023 or sometime in 2024.

DOE plans to issue program guidelines this coming spring, after which states can submit their rebate program applications for DOE’s review. Once finalized, the state energy agency must implement its rebate program. It is our hope that regional hubs such as Alaska Heat Smart will be able to assist in the program’s process, applying our local knowledge and knowhow.

Aren’t there two different rebate programs?

Yes! First, there is the High Efficiency Electric Home Rebate Program (Section 50122). These rebate will be deducted from the the cost of energy efficiency equipment and appliances.

Second, is the other major rebate program for household building electrification, known as the HOMES Program (Section 50121). This program is more complicated and targets comprehensive home energy retrofits. The amount that single-family homeowners, multi-family building owners, and LMI-occupied properties receive from HOMES is based on modeled energy savings resulting from the planned upgrade(s), which can fall into one of three tiers: 15-20 percent, 20-35 percent, and greater than 35 percent savings on kWh or kWh-equivalent basis.

Will my household qualify for a rebate? If so, how much in savings could we see?

According to ‘Rewiring America’, the High Efficiency Electric Home Rebate Act (HEEHRA, Sec. 50122), includes $4.5 billion in direct rebates for low- and moderate-income households that install new, efficient electric appliances. Alaska will receive about $37 million for this program.

For instance, a low income household (annual household gross income below 80% of median area income – see table) may be able to receive a rebate covering the full cost of a heat pump installation, up to a cap of $8,000.

# in home 1 234 5 6
80%
MAI
$62,600$71,550$80,500$89,400$96,600 $103,750
150%
MAI
$117,376$135,945$150,696$167,357 $180,835 $194,200
Source: https://www.huduser.gov/portal/datasets/il/il2022/2022summary.odn

Qualifying households could also receive up to $1,750 for a heat pump water heater, $840 for an electric stove, and $840 for an electric clothes dryer. If required, qualifying households can also receive up to $4,000 for an upgraded breaker box, $2,500 for upgraded electrical wiring, and $1,600 for insulation, ventilation and air sealing.

For moderate income households, (annual household gross income between 80% median area income and 150% median area income), the same rebates are available to cover 50 percent of the costs.

If the rebates are not available for a year or more, should I wait or should I install a heat pump now?

Waiting to install a heat pump will have some advantages as well as a few potential disadvantages.

If your overall household income is less than 80% of the area median income (see table in above question), you may be eligible for an $8,000 heat pump rebate. Additionally, you may be eligible for up to $6,500 in electrical panel improvements and wiring, often barriers to improvements in older homes that have limited power running (known as ‘service’) to the home, or that have an undersized or full electrical panel. If you feel that your home may need electrical work and you know that you want to add a heat pump to your home and you are confident that you meet the income limits, you may want to delay until rebates are available. Having an electrician inform you of your electrical service or panel needs is an important first step in this decision making process.

You should take into consideration any projected changes in your household annual income over the next 12 months. If you can start saving on energy bills now, versus waiting for a year a more only to find that you’re no longer eligible, it may be wise to start your improvements sooner than later.

Many of these sorts of questions can be addressed with an Alaska Heat Smart home heat pump assessment. Our free assessments provide a wealth of informative and empowering home energy information allowing you to feel confident about your heating system decisions.

How urgent is your home heating situation? Are you facing a dying boiler? Do you need a heat source now? Are you just so over oil burning that you just can’t wait any longer? If one or more of these situations exist, you may not want to wait up to two years, or you may not be able to. If you believe that you are eligible for a rebate, then you are likely eligible for Alaska Heat Smart’s heat pump incentive program. This $1,500 to $3,000 incentive program should be available later this fall. Combining the AHS heat pump incentive with a $2,000 heat pump tax credit may cover a significant portion of the cost of your heat pump.

If I receive an incentive from Alaska Heat Smart’s Heat Pump Incentive Program, am I also eligible for a rebate from the IRA bill?

We don’t quite know how to fully answer this yet. Both programs will be overseen by the Department of Energy. Quite often, multiple benefits like these cannot be ‘stacked up’. Alaska Heat Smart’s Heat Pump Incentive Program must see funds applied to a home’s first heat pump. It is possible that the heat pump rebate could be used for a home’s second heat pump, if one is needed. Or, the rebate could be used in a detached garage or apartment space.

A household may be eligible for both the AHS incentive program and some federal rebates because rebates are available for items other than heat pumps. An eligible household could also receive rebates worth up to $1,750 for a heat pump water heater, $840 for an electric stove, and $840 for an electric clothes dryer. If required, this household can also receive up to $4,000 for an upgraded breaker box, $2,500 for upgraded electrical wiring, and $1,600 for insulation, ventilation and air sealing.

For moderate income households, (annual household gross income between 80% median area income and 150% median area income), the same rebates are available but only at 50 percent of the maximum.

In order to secure a rebate, must I first spend the money and then receive my rebate?

Typically, a rebate is an after-the-purchase return of some percentage of your purchase. The details are not yet clear, but federal intent is to make the rebates active at ‘the point of sale’, meaning that the rebate amount will be taken off the original purchase price. We hope to better understand this issue soon.

If I install a heat pump and have my electrical panel upgraded now, will a rebate retroactively cover the expenses?

The Inflation Reduction Act authorizes states to provide rebates for Home Efficiency Rebates begun on or after enactment of the law. Given that states must establish programs that ensure compliance with the law (e.g., eligibility of household, technology, program reporting), it will be difficult to offer rebates for projects completed before program requirements are fully defined and programs are in place.  

If a state is interested in offering rebates retroactively – that is, for projects completed before the state’s program is established, the state’s application to DOE will need to outline how the state will determine if these projects meet all program requirements. DOE plans to issue program guidelines in this spring, after which states can submit their applications for DOE’s review. It may be possible for Alaska to retroactively cover rebates for the High Efficiency Electric Home Rebate Program (Section 50122), but the law does not authorize States to offer Home Electrification Rebates retroactively (Section 50121)

In Summary: what’s in it for me?

How can I get a quick snapshot of how I may benefit from the IRA’s credits and rebates?

‘Rewiring America’, the leading electrification nonprofit, focused on electrifying everything in our communities, has created a slick IRA calculator to show what the act may have for you. Check out their great work HERE.

If you find this FAQ page helpful and if you know of others who may benefit from this page and from the credits and rebates of the Inflation Reduction Act, please share! Alaska Heat Smart will be paying close attention to the Act’s details and we’ll update this page as we learn more.

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