If you’ve been holding off on home improvements, a new law signed last year and in effect as of Jan. 1, 2023, may provide a fresh incentive.
The Inflation Reduction Act, or IRA, includes tax credits and rebates for homeowners who make energy-saving updates to their homes. Credits for improvements like new solar panels, windows, doors and air conditioners are available now, while rebates for larger energy-efficient updates are expected to become available later this year or next year.
Here’s what to know about these perks, plus tips to plan your projects.
Tax credits for smaller updates
The IRA includes tax credits for around-the-house eco-friendly updates. Eligible purchases include energy-efficient windows, doors, insulation, central air conditioners and home energy audits. An IRS fact sheet outlines eligible home improvements.
Tax credits reduce your tax liability for the year, says Los Angeles-based certified public accountant Michael DiBernardo. For example, a $500 credit lowers your taxes owed by $500.
The IRA allows homeowners a 30% tax credit for some energy-efficient updates, capped at $1,200 per year. There’s also a $2,000 credit for heat pumps, heat pump water heaters and biomass stoves.
Make the most of it: Combining projects — like new insulation and a heat pump — can get you up to $3,200, says Kara Saul Rinaldi, president and CEO of the energy and environmental strategy firm AnnDyl Policy Group and an advocate of policies that helped shape the IRA.
Keep receipts for each eligible update and add them to your tax forms, Saul Rinaldi says.
Plus: If you haven’t filed your taxes yet, here are 11 last-minute tips to help
Increased credits for solar panels
The IRA also increased the credit for solar installations. Homeowners can get a tax credit for 30% of the cost to buy and install solar panels — up from the previous 26%. And there’s no dollar limit. If you pay $15,000 to put solar panels on your house, you can claim a $4,500 tax credit.
Any unused credit carries to future years, so if you don’t owe taxes this year, you can use it later.
Make the most of it: The tax credit will reduce the cost of going solar, but if your goal is to lower your utility bill, first determine when you’ll see savings. This often depends on how much you currently pay, says Duane Knickerbocker, owner of Brower Mechanical, a Sacramento-based company that helps homeowners optimize energy use.
The average payback period for solar panels is six to nine years, according to the Center for Sustainable Energy, a policy and research firm.
Also see: I bought a used EV and now want solar panels. Can I claim tax credits for both in the same year?
Rebates to generate big savings — eventually
The “difference makers” in the IRA are two new rebates, Knickerbocker says. One program offers up to $8,000 for lowering the home’s energy use and the other provides up to $14,000 for electrification updates like appliances and breaker box upgrades.
Unlike the credits, the rebates are designed to be offered at the point of sale.
Low- to moderate-income households — defined in the IRA as those with total annual incomes of less than 80% of their surrounding area’s median — are eligible for larger rebates than those with higher incomes.
Even if you don’t usually owe taxes and can’t use the IRA credits, the rebates mean you can still get a discount on energy-efficient updates, Saul Rinaldi says.
Make the most of it: It’ll be months, at least, before homeowners can get the rebates.
In the meantime, consider a home energy audit to determine which projects to start once the rebates are available. Then work the savings into home improvement plans for this year and next, Saul Rinaldi says.
Don’t miss: IRS reveals how it’s spending $80 billion in extra funding — wealthy taxpayers and large corporations can expect more scrutiny
Financing energy-efficient home updates
The cost of some home improvements could diminish the IRA tax incentives. Here are ways to supplement financing for your project.
Other assistance. The North Carolina Clean Energy Technology Center manages a database of state and local incentives that includes resources like solar installation rebates and low-interest loan programs.
0% interest credit card. A 0% annual percentage rate, or APR, credit card may be just as good as cash if you pay it off during the no-interest period, says Travis Gatzemeier, a certified financial planner based outside of Fort Worth, Texas. Good or excellent credit is usually required to qualify.
Home equity. If you have equity, consider a home-equity loan or line of credit to finance larger updates, like new solar panels. Rates are often lower than personal loans and credit cards, but your home is collateral for the loan.
Personal loans. Unsecured personal loans are a fast way to cover home updates and repairs: Some lenders provide funds the same or next day after approval.
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Annie Millerbernd writes for NerdWallet. Email: amillerbernd@nerdwallet.com.
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