Inflation Reduction Act: Your Questions Answered
Inflation Reduction Act Energy Efficiency Tax Credits (25C)
The Inflation Reduction Act (IRA) Residential Energy Efficiency Tax Credits are tax credits that provide homeowners with money back on the cost of improving their home’s energy efficiency. This can help offset the cost of making energy-efficient upgrades such as new AC systems, insulation, heat pumps, heat pump hot water heaters, electrical panel upgrades and energy audits. The IRA tax credit was created to encourage Americans to make their homes more energy efficient in order to save money on their utility bills and reduce pollution from fossil fuels.
Qualifying Years: January 1st, 2023 – December 31st, 2032
Am I Eligible for the IRA Energy Efficiency Tax Credit?
You must be a homeowner and the upgrades must be completed on your primary residence. All types of homes qualify – single family, condos, townhomes, mobile homes and multifamily apartments. You must also have tax liability, which means that you have to file a tax return and owe taxes for the year you are applying for the Inflation Reduction Act Energy Efficiency Tax Credit (25C). If you don’t have any income or deductions, then there’s no reason for you to claim this credit.
I am Building a New Home or am a Home Builder – Do I Qualify?
No, the 25C Energy Efficiency Tax Credit is strictly intended for existing homes. However, there are other energy efficiency tax credits home builders can claim if the home they are building meets ENERGY STAR guidelines. More information can be found on the ENERGY STAR website.
Types of Energy Efficiency Improvements that Qualify for the IRA Energy Efficiency Tax Credit (25C)
Below are some guidelines and comparison of prior year’s tax credits on energy efficiency upgrades versus the tax credits for heat pumps, insulation and other energy efficiency measures under the new IRA tax credit 25C:
Heat Pumps IRA Tax Credits Between Years 2023 – 2032
| Previous Law | NEW IRA Law |
| 10% of the cost up to $300 | 30% of the cost up to $2000 |
| ● 15 SEER for Split HP systems (14 SEER for Packaged Heat Pumps) ● 12.5 EER (for split heat pumps) 12 EER for packaged heat pumps ● 8.5 HSPF for split heat pumps (8 HSPF for packaged heat pumps) | ● 16 SEER2 ● 12 EER2 ● 9 HSPF2 for both Split and Packaged HP |
Insulation / Air Sealing IRA Tax Credits Between Years 2023 – 2032
| Previous Law | New IRA Law |
| 10% cost of insulation material up to $500 | 30% of insulation and air sealing materials up to $1200 |
| Credit is subject to a taxpayer lifetime limit of $500 | Credit available annually |
| Tax Credit expired | Current structure will go through 2032 |
Central Air Conditioner (NON Heat Pump) IRA Tax Credits Between Years 2023 – 2032
| Previous Law | New IRA Law |
| 10% of the cost up to $300 | 30% of the cost up to $600 |
| 16 SEER for Split AC systems | 16 SEER2 for Split systems |
| 14 SEER for packaged AC/gas packs | ALL packaged gas packs are eligible (any SEER) |
Electrical Panel Upgrade IRA Tax Credits Between Years 2023 – 2032
| Previous Law | New IRA Law |
| N/A | 30% of the cost up to $600 |
| N/A | Must be installed in conjunction with a new AC, heat pump, or heat pump hot water heater to qualify |
| N/A | Must have a load capacity of greater than 200 amps |
Water Heater IRA Tax Credits Between Years 2023 – 2032
| Previous Law | New IRA Law |
| $300 tax credit for gas hot water heaters | Gas hot water heater less than 55 gal: 30% of the cost up to $600 |
| $300 tax credit for heat pump hot water heaters | Heat pump hot water heater: 30% of the cost up to $2000 |
Energy Audit IRA Tax Credits Between Years 2023 – 2032
| Previous Law | New IRA Law |
| N/A | 30% of cost up to $150 completed by a certified energy auditor |
How Much Can I Expect to Save on My Taxes?
The IRA Energy Efficiency tax credit is a percentage of the cost of your energy improvement. You can use this credit to reduce your taxes and claim as much as 30% of the cost of the energy efficiency improvements made, capped at $3,200 per year in total. You are able to claim this every year, as long as the home you made the upgrades on is your primary residence.
Does AC or Heat Pump Equipment that Was Purchased in 2022 Qualify for the New IRA 25C Energy Efficiency Tax Credit?
Unfortunately, no. Energy efficient upgrades that were purchased in 2022, don’t qualify. However, there were tax credits in 2022 that you could qualify for. A list of all tax credits and eligibility can be found by following this link to the ENERGY STAR historical tax credit site.
Are These IRA Tax Credits the Same as the Other Programs the Inflation Reduction Act Came Out With?
No, there were 3 separate energy efficiency incentives that came out for existing residential homes – the Energy Efficiency Tax Credits (25C), Hope 4 Homes, and the High Efficiency Home Rebate Program. There are several rebates (not tax credits) that homeowners will be able to qualify for as well at some point but the government hasn’t sorted those details yet. These rebates will likely be based on modeled energy savings or actual measured energy savings. These rebates will be for all electric homes and the max rebate will be dependent on income status and energy savings achieved or modeled. Upgrades that will be able to qualify for the rebate will be – heat pumps, heat pump hot water heater, breaker box, insulation/air sealing and ERVs.
The government should have this program finalized by June 2023, which means, Arizona might be able to start offering the rebates once there is a program aggregator at the state’s energy office, realistically sometime in 2024.
Final Thoughts
The Inflation Reduction Act Residential Energy Efficiency Tax Credit is a great way to save money on your taxes while saving energy. This credit can help offset the cost of making your home more energy efficient by providing an incentive for homeowners who install certain types of improvements in their homes, such as insulation or new air conditioning systems and heat pumps.
Plus, when you combine the Energy Efficiency Tax Credits with our local SRP and APS rebates, you can save a substantial amount off the cost of your heat pump or AC replacement in your Phoenix, Chandler or Scottsdale home.
If you think that this might be something you want to take advantage of, contact us today so we can go over your options with you!