Your cheat sheet to the climate law’s consumer incentives

Canary Media’s Electrified Life column serves up real-world tales, tips and insights that demystify the process of shifting your home to electric power. Canary thanks Lunar Energy for its support of the column.

When President Joe Biden signed the Inflation Reduction Act into law one year ago, he did more than supercharge U.S. manufacturing and the deployment of renewable energy — he also gave households a big pot of money to electrify their own lives.

The climate law delivers a game-changing bonanza of clean energy incentives to consumers. With a historic $8.8 billion in funding for rebates, plus an array of generous tax credits that have no federal spending cap, there’s never been a better time to start plotting out a roadmap for ditching fossil-fuel-burning appliances and electrifying your home, according to Sage Briscoe, director of federal policy at electrification nonprofit Rewiring America.

After all, the climate law’s benefits don’t last forever. Unless renewed, the tax credits expire or ratchet down after 2032, and the rebates will only be available until their funding runs out.

But figuring out a game plan to take advantage of the IRA’s incentives can be daunting. Some of the benefits aren’t available yet, while others that are finalized have fine print that can be tricky to navigate if you want to make the most of them.

This article aims to make that task a bit easier. Think of it as a cheat sheet for the IRA’s consumer incentives, including who they’re for, how to use them — and when they might be available if they’re not already.

Getting to know the IRA’s consumer tax credits and rebates

The IRA has two kinds of benefits for consumers: tax credits and rebates.

The tax credits directly decrease your federal taxes, and they’re available now. You can’t receive more in tax credits than you owe the government, though, so if your tax bill is $0, you won’t qualify for these incentives.

The Residential Clean Energy Property Credit (under tax code 25D) will lower your federal tax bill by up to 30% of the cost of a clean energy installation such as solar panels, battery storage and geothermal heat pumps. The credit is uncapped, so whatever the cost of the project, you can claim the full 30 percent. You can even use the tax credit for multiple projects in the same year, and if your tax bill isn’t big enough, you can carry the savings forward to reduce taxes in future years.

Two tax credits can help you buy an EV: the Clean Vehicle Credit (30D) will reduce your federal tax bill by up to $7,500 if you buy a qualifying new EV. And the Used Clean Vehicle Credit (25E) will lop 30% of the cost of the vehicle off your tax bill if you buy a qualifying used EV, with a cap of $4,000. Both of the EV credits have specific income thresholds for consumers: for single tax filers, these are $150,000 for the new EV credit and $75,000 for the used EV credit, with amounts doubled for joint filers.

Also, not every EV is eligible due to some domestic-manufacturing requirements and price limits; DOE maintains an updated list of qualifying cars here.

Finally, the Energy Efficient Home Improvement Credit (25C) can help you make a variety of home energy-efficiency upgrades, from installing insulation to buying air-source heat pumps. These credits shrink your tax bill by up to 30% of costs and are capped annually: up to $2,000 for a heat-pump air conditioner/​heater or a heat-pump water heater, and separately, up to $1,200 on other qualifying improvements. That means you can claim a total of $3,200 in any single year.

Because this credit resets annually, spacing out upgrades makes financial sense. For example, it’s better to get the heat pump and heat-pump water heater in different years to claim the credit twice and potentially reduce your tax bill by $4,000, rather than buy both appliances in the same year and only be able to claim $2,000.

Work with your contractor to figure out eligibility for the home-related tax credits, or if you’re buying appliances yourself, make sure to double-check that they qualify. The Department of Energy has more information on each type of incentivized upgrade, and the IRS has an in-the-weeds fact sheet to help you wrap your head around them. Save your receipts and claim the credits when you file your taxes.

A closer look at efficiency and electrification rebates

The IRA rebates are a different animal. They provide discounts on home efficiency and electrification upgrades at the point of sale, so you don’t have to wait until you file your taxes. And although higher-income households will be able to access some of the rebates, they’re primarily geared toward helping lower-income families.

While the tax credits disproportionately benefit wealthier homeowners who tend to have bigger tax bills, ​“the rebates are the vehicle for equity in this space,” Rewiring America’s Briscoe said.

Let’s take a closer look at the IRA’s two forthcoming rebate programs.

One program is for home efficiency rebates (Section 50121 of the law), often called the ​“HOMES rebates.” This is a performance-based program whose details will ultimately depend on how states choose to implement it.

But in essence, the program awards rebates to homeowners and multifamily-property owners who undertake whole-home retrofits that save energy. If they cut a home’s energy use by 35% or more, they can qualify for 50% off the cost of the project, capped at $4,000. Low-income homeowners, defined as earning less than 80% of the area median income, can qualify for double the dollars: up to $8,000 or 80% off the cost of the retrofit. A multifamily-building owner could also use this $8,000/80% incentive if at least half of the building’s households have incomes below 80% of the area median income.

Consumers will most likely interact with contractors while doing the retrofit and receive the rebate as a discount off their project bill.

The other rebate program, called HEEHRA, is for home electrification (Section 50122 of the IRA). These rebates will be like coupons for appliances or other home efficiency and electrification upgrades, including heat pumps, insulation and electric induction stoves.

Both moderate-income families (earning between 80% and 150% of area median income) and low-income families (earning less than 80% of area median income) will qualify for the rebates. But while moderate-income households can use them to cover up to half of a project’s costs, low-income households can use them to cover the whole thing, up to a total of $14,000.

Building owners can also use the HEEHRA rebates to benefit renters; owners of multifamily buildings will be able to combine tenants’ rebates to electrify shared resources, Briscoe said. ​“If you’ve got shared hot water, which isn’t that uncommon…you could pool that funding” and, for example, upgrade the building’s gas water heater to an electric heat-pump water heater.

Though the details will depend on the states, in practical terms, the HEEHRA rebates could shrink your contractor bill. Or if you’re buying an appliance yourself, a rebate could be a digital voucher you get from the state energy office that you use at checkout to lower the cost, Briscoe told Canary Media.

Rebates from the two programs can be mixed and matched for distinct upgrades, according to Kara Saul Rinaldi, chief policy officer for the Building Performance Association, an industry group. But tax credits and rebates can be combined for the same improvements; after subtracting the value of the rebate, you can use the relevant tax credit on the remaining cost.

Though neither the HOMES nor HEEHRA rebates are available just yet, the DOE did hit a milestone in July. It provided extensive guidance to state energy offices that need to design the programs to administer the rebates. The BPA anticipates that most states will start issuing rebates in 2024, and some could even be ready in late 2023. So keep an eye on your state energy office for updates.

Tools to navigate your energy transition

If you want to go deeper into the incentives available to you, here are a few other resources to check out:

• The Department of Energy’s Energy Savings Hub is a choose-your-own-adventure electrification catalog. It illustrates all of the federally incentivized changes you can make in your own home — and features a dog named Sparky.
• Rewiring America’s interactive IRA Savings Calculator shows what the climate law could do for you, given your unique situation. (Canary Media gave it a whirl when it first came out.) Using a few pieces of information about your income and household, this tool zeroes in on relevant upgrades and tallies how much money you could get to electrify your life.
• And here’s some past coverage from Canary Media to help you prepare: Before making any big purchases, experts recommend taking steps such as scheduling an energy audit, checking out your electrical panel, and seeing what other utility, local and state funding might be available to make your home more efficient and electric.

The IRA encourages people to take actions that finally meet the moment on climate, Briscoe said. ​“By electrifying our homes and our lives, we really can make this huge step in reducing our own emissions and be a beacon to our neighbors, friends and family to show them what they can do.”

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