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Extension, Increase, and Modifications of Nonbusiness Energy Property Credit
Taxpayers were allowed a personal tax credit for certain nonbusiness energy property expenditures. The credit originally expired in 2021.
2022: The old 10% credit (with the lifetime $500 maximum) has been reinstated for 2022. It only applies to energy expenditures for a principal residence.
Law Change. A new tax credit takes effect in 2023 and applies through the end of 2032. The new credit applies to any personal residence, not just a principal residence. The credit is now called the “Energy Efficient Home Improvement Credit.”
Increased credit. The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred during that year.
Annual limitation instead of a lifetime limitation. The Act generally limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors).
The credit is also allowed for amounts spent for a home energy audit (on a principal residence only.) The amount of the credit due to a home energy audit can't exceed $150. This is in addition to the general $1,200 annual credit limitation.
Note: A $2,000 annual limit (instead of the general $1,200 limit) applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
Extension and Modification of Residential Clean Energy Credit
Taxpayers are currently allowed a personal tax credit, known as the residential energy efficient property (REEP) credit. This is available for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes through 2023. The credit is at a 26% rate (reduced from the original 30%.)
Law Change. The Act reinstates the full 30% credit for 2022 and 2023 and extends the 30% credit through 2032. The credit is allowed at a lower level for 2033 and 2034. The Act also makes the credit available for qualified battery storage technology expenditures, starting in 2023. Qualifying battery storage is generally defined as having a capacity of at least 3 kilowatt hours.
The credit continues to be allowable for the kinds of expenditures (noted above) that are installed in any personal residence (except for fuels cells which must be installed in a principal residence.)
Note: The Act removes qualified biomass fuel property from eligibility for this credit after 2022.
Extension, Increase, and Modifications of New Energy Efficient Home Credit
The New Energy Efficient Home Credit (NEEHC) was available to eligible contractors to construct qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.
2022: The Act reinstates the old credit for 2022 under the old efficiency rules and credit limits, noted above.
Law Change. The Act expands the credit, starting in 2023 and running through 2032. The credit is available for qualified new energy efficient homes and can be:
· $500 or $1,000, per unit for multi-family dwellings or
· $2,500 or $5,000 for single family homes,
depending on which energy efficiency requirements the home satisfies (Energy Star new single family, manufactured and new multi-family requirements.)
Prevailing Local Wage Requirement. There is also a requirement that the construction of the home or dwelling meets “prevailing local wage” requirements. These prevailing wage requirements are meant to ”…ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of such residence shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor,…”
· We expect further guidance on what this means - the prevailing local wage provision applies starting in 2023.
New Clean Vehicle Credit
A taxpayer can currently claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year.
Law Change. The tax credit will now be called a “Clean Vehicle Credit” and eliminates the limitation on the number of vehicles eligible for the credit. Final assembly of the vehicle must take place in North America.
Cap on Cost. The Act provides for a maximum $7,500 credit for a new vehicle, with a major change: There are now caps on the price of new vehicles that qualify for that credit. The caps are $55,000 for clean cars and $80,000 for clean SUVs, vans and pickup trucks.
Income Limitation. In addition, no credit is allowed if the taxpayer’s modified adjusted gross income either for the year of purchase or for the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others.
Credit Calculation. The way the credit is calculated is changing. The calculation can be complicated; there is more emphasis placed on where the battery components and critical minerals used in the battery are sourced and processed.
Transfer of Credit. Finally, it will be possible (starting in 2024) to transfer an allowable tax credit to a dealer in exchange for cash (or for use towards a down payment on the vehicle.) This can only occur where the taxpayer qualifies to take the credit (see income limits above.) There will be no taxation to the buyer for the receipt of this cash or down payment credit in exchange for the credit.
Guidance. The Internal Revenue Service has issued preliminary guidance on the credit. This can be found at https://www.irs.gov/businesses/plug-in-electric-vehicle-credit-irc-30-and-irc-30d. An initial list of frequently asked questions can be found at https://home.treasury.gov/system/files/136/EV-Tax-Credit-FAQs.pdf
Finally, the Department of Energy has released a list of possible vehicles that could qualify for the new credit at https://afdc.energy.gov/laws/inflation-reduction-act
We expect there will be additional guidance released in the weeks and months ahead.
Credit for Previously Owned Clean Vehicles
Law Change: Starting in 2023, a qualified buyer who acquires and places in service a previously owned clean vehicle is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price.
The definition of a clean vehicle for this purpose is generally the same as under the new clean vehicle credit (see above) except that the vehicle’s final assembly does not have to be in North America.
Income and Price Limitation. No credit is allowed if the taxpayer’s modified adjusted gross income either for the year of purchase or for the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
Interestingly, a qualifying previously owned vehicle must be purchased from a vehicle dealer. And it will be possible, starting in 2024, to transfer the allowable credit to a dealer as noted above with regard to new clean vehicles.
New Credit for Qualified Commercial Clean Vehicles
Law Change. There is a new qualified commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022.
The credit per vehicle is the lesser of:
1) 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or
2) the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine.
“Acquire” means a purchase or lease but not a purchase for re-sale. There are certain battery capacity requirements that must be met, depending upon the weight of the vehicle. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.
Favorable Health Insurance Premium Tax Credit Rules Remain in Effect for 2023-2025
The refundable health insurance Premium Tax Credit (PTC) is available on a sliding scale basis for individuals and families enrolled in an Exchange-purchased qualified health plan and who were not eligible for other qualifying coverage. The PTC is partially based on the taxpayer’s household income multiplied by an applicable percentage, which was then indexed based on the rates of premium growth relative to income growth.
The American Rescue Plan Act of 2021 (ARPA) suspended indexing for 2021 and 2022 and substituted a statutory table with favorable rates that resulted in a higher health insurance tax credit for many taxpayers.
Law Change. For tax years beginning in 2023 through 2025, the health insurance premium tax credit is available to taxpayers with household incomes that exceed 400% of the federal poverty level, as it was in 2021 and 2022. This change allows more taxpayers to claim the health insurance premium tax credit for 2023 through 2025 than would have qualified under pre-Act law.
Adapted from copyrighted materials provided by Thomson Reuters/Tax & Accounting, Checkpoint Federal Tax Update, “Summary of Senate-Passed Inflation Reduction Act of 2022” (08/09/2022) and “Client Letter: Inflation Reduction Act's Individual, Small-Business Credits” (08/26/2022)