The recently passed 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.
We’ve organized these questions and answers into two sections, one for tax credits, which are the near-term benefits (now and more so after Jan. 1, 2023), and one for rebates, which are the longer-term benefits (perhaps in late 2023 or early 2024).
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
What is the difference between a tax credit and a rebate?
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 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 are the new tax credits for and are they in effect now or not until January 1, 2023?
One of the tax credits that homeowners may be familiar with – the Nonbusiness Energy Property Credit – actually expired at the end of 2021. However, the Inflation Reduction Act brings it back to life, improves it substantially, and gives it a new name – the Energy Efficient Home Improvement Credit. There was a lifetime limit of $500 for the credit (e.g., credits taken in previous years counted towards the limit). There was also a $200 lifetime limit for new windows. These limits severely restricted the overall value of the credit. There were also other individual credit limits for air circulating fans ($50); some furnaces and boilers ($150); and certain water heaters, heat pumps, and air conditioning systems ($300).
The credit is revived for the 2022 tax year, and the pre-expiration rules and limits apply. However, starting in 2023, the credit will be equal to 30% of the costs for all eligible home improvements made during the year. It will also be expanded to cover the cost of electric breaker panels and related equipment, as well as home energy audits. Roofing and air circulating fans will no longer qualify for the credit, though. Some of the energy-efficiency standards will be updated as well and additional rules may be in place for 2024.
The $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount (the lifetime limit on windows will go away, too). So, if you spread out your qualifying home projects, you can claim the maximum credit each year. The annual limits for specific types of qualifying improvements will also be modified – and for the better. Beginning in 2023, they will be:
- $150 annual limit for home energy audits;
- $250 annual limit for an exterior door ($500 total for all exterior doors);
- $600 annual limit for exterior windows and skylights; central air conditioners; electric breaker panels
- $2,000 annual limit for electric heat pump water heaters, electric heat pumps, and boilers (for this one category, the $1,200 annual limit may be exceeded).
Should I buy a heat pump now or should I wait?
The correct answer to this question is home-specific. It appears that if you wait until after January 1, the heat pump tax credit will jump from $300 to $2,000. If in order to install a heat pump your home requires some electrical panel work, this credit becomes available on 1.1.23. 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.
Another consideration is the simple fact that many homeowners are likely to want to take advantage of this program. A rush on heat pump installations and electrical upgrades after January 1 is likely. Juneau’s contractor capacity is already strained and installations can require up to a two month wait before completion. Winter weather slows the process even more. A good strategy may be to get the ball rolling now with the aim of having your installation and electrical work take place as soon as possible after January 1.
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.
Starting in 2023, the credit will be 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. It may be safe to assume therefore that if you install a heat pump after 1.1.23, you will be eligible for a $2,000 tax credit for the pump as well as $1,200 for other measures taken. Again, details like these continue to emerge and the information we provide here is based on our current analysis.
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).
Rebates: income qualified
When will rebates become available?
Perhaps by fall 2023 or sometime in 2024.
For rebates to be available the Department of Energy must finalize their program. Once finalized, the state energy agency must develop its rebate program and allocate funds via its application process. It is our hope that regional hubs such as Alaska Heat Smart will be able to process funds locally though a rebate program of our own. The formation of these programs is going to take some time, more than likely a year at a minimum. We’ve been told up to two.
Will my household qualify for the energy efficiency rebates? If so, how much could we receive?
According to ‘Rewiring America’, the High Efficiency Electric Home Rebate Act (HEEHRA), includes $4.5 billion in direct rebates for low- and moderate-income households that install new, efficient electric appliances. 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.
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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 a small and fully used 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 tax 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 there is discussion at the federal level about the possibility of making the rebates active at ‘the point of sale’, meaning that the rebate amount can be taken off the original purchase price. We hope to better understand this issue soon.
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.
September 1, 2022
August 25, 2022