New environmental-related tax credits that benefit both individuals and small businesses are part of the recently enacted Inflation Reduction Act of 2022 (IRA). The Act also extends and changes a few existing credits.
New Clean Vehicle Credit (up to $7,500)
The IRA extends the current tax credits of up to $7,500 for qualifying electric vehicles, plug-in hybrids, and hydrogen-powered vehicles.
Manufacturing Requirements. The IRA makes key changes to the clean vehicle tax credit. These changes will become effective over time. The introduction of the North American final assembly requirement is the only change to the current clean vehicle credit that went into effect this year (after August 16, 2022). The clean vehicle credit rules, which existed before the enactment of the IRA, are still in effect. Beginning in 2023, additional modifications to the eligibility requirements will be made.
- The list of qualifying vehicles is continually updated by the federal government. Review the list here.
- Taxpayers can use the National Highway Traffic Safety Administration’s VIN Decoder tool to determine whether the vehicle satisfies the final assembly requirement. Enter the vehicle’s 17-character vehicle identification number (VIN) and check the “Plant Information” field to find where the car was manufactured.
Price Requirements. Low-emission trucks, SUVs, and vans with manufacturer-suggested retail prices (MSRPs) up to $80,000 and cars with MSRPs up to $55,000 are the only vehicles that qualify for this tax credit.
Income Requirements. The buyer’s income also determines whether they are eligible for the credit. The $7,500 credit is available to single filers making up to $150,000 in adjusted gross income, head of household filers making up to $225,000, and joint filers making up to $300,000.
Claim Credit. While buyers will still be able to claim the tax credit on their annual tax returns, starting in 2024, they will also be able to transfer the credit’s value to dealers at the point of sale so that they may start taking advantage of it right away.
Pre-Owned Clean Vehicle Credit (up to $4,000)
A separate clean vehicle tax credit for used cars will be available starting on January 1, 2023. It will be worth $4,000 or 30% of the car’s price, whichever is lower.
Price Requirements. The credit will only be available to pre-owned vehicles that cost $25,000 or less.
Vehicle Requirements. To qualify, the previously owned clean vehicle must be a model year that is two years old.
Income Requirements. Buyers of used clean vehicles can only qualify if their adjusted gross income of less than $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers.
Qualified Commercial Clean Vehicle Credit (up to $40,000)
The IRA also provides a business tax credit for buyers of qualifying commercial clean vehicles (EVs and fuel cell vehicles).
- The credit is worth 30% of the purchase price, up to $7,500 for vehicles weighing less than 14,000 pounds and up to $40,000 for all other vehicles,
- The vehicle must be acquired and placed in service on or after January 1, 2023.
- Additionally, eligible vehicles must have batteries with a 15 kilowatt-hour or greater capacity (7-kilowatt-hour batteries are required for vehicles weighing less than 14,000 pounds).
Residential Clean Energy Credit Extension
The Residential Clean Energy Credit (formerly called the Residential Energy-Efficient Property Credit) can be used to offset up to 30% of the cost of qualifying residential solar panels, wind turbines, solar water heating equipment, and geothermal heat pumps, including on-site preparation, assembly, and installation.
Under the IRA, the tax credit is now available to property placed in service in 2022 through 2034. For property put into service in 2021, the credit rate stays at 26%; it increases to 30% for tax years 2022–2032; it declines to 26% in 2033 and then to 22% in 2034. The credit has no dollar limit, and most homes are eligible, even if they are not the taxpayer’s primary residence.
Energy Efficient Home Improvement Credit
The IRA expands and extends the Energy Efficient Home Improvement Credit, formerly known as the Nonbusiness Energy Property Credit. This credit expired in 2021 but has now been extended and is available in 2022. For the tax year, 2022 old rules apply and the credit is limited to 10% of the cost with an annual cap of $500. The taxpayer’s primary or secondary residence can qualify for the credit. Property placed in service after December 31, 2022, is subject to new regulations.
For tax years 2023 to 2032, the credit is worth 30% of the amount you spent during the year on home energy audits, residential energy property, and qualified energy efficiency improvements. The maximum credit for each taxpayer is $1,200 per year. There are certain items with other annual limits:
- $150 for energy audits
- $250 for one exterior door; up to $500 for all exterior doors
- $600 for residential energy property expenditures, windows, and skylights
- $2000 for heat pumps, heat pump water heaters, and biomass stoves and boilers.
Get in touch with us for more information on maximizing these new and revised tax credits.
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