How the Inflation Reduction Act of 2022 Can Lower Your Energy Bills

Update: President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022.

With a monumental climate bill now law, Americans have a new and improved set of incentives to electrify their homes and reduce their energy bills.

Home and vehicle electrification is a win-win as it lowers energy costs and reduces the greenhouse gas emissions from everyday actions. But the upfront cost of electrification has historically prevented many Americans from enjoying long-term savings.

With $369 billion set aside for climate investments, the Inflation Reduction Act (IRA) of 2022 is a total game changer. Namely, it offers tens of thousands of dollars in rebates and tax incentives to Americans that electrify with rooftop solar, battery storage, electric vehicles, heat pumps, and more.

President Biden signed this historic climate bill in US history on August 16, 2022, officially paving the way for huge energy savings and emissions reductions. Here’s how the Inflation Reduction Act of 2022 benefits everyday Americans.

What’s in the Inflation Reduction Act for solar customers?

One of the most valuable incentives in the Inflation Reduction Act is the extension of the 30% Residential Clean Energy credit, commonly known as the solar investment tax credit or ITC.

This incentive was scheduled to step down from 26% in 2022 to 22% in 2023 before going away entirely for consumers in 2024. Effectively immediately, it’s back up to 30% for all solar projects installed from 2022 to the end of 2032.

Quick note: Although it’s referred to as the “solar tax credit,” it also applies to battery storage!

That’s right, through 2032, residential and commercially installed solar alike can reap a 30% tax benefit on installed solar and battery storage equipment.

Yeah, that’s a lot of green.

Why the extra 8% in 2023 from the solar tax credit matters

Let’s say you decide this holiday season to purchase a $25,000 rooftop solar array for your house. If you start the process in November or December, you’d likely be looking at an installation date in 2023 (these projects take time to plan, permit, and schedule).

Without the IRA, you would get a tax credit worth 22% of the total cost of the project, or $5,500.

Not a bad chunk of change.

But with the beef-up from the IRA, the incentive is back to 30% and pushes your tax credit up to $7,500 on your $25,000 project. That increases the incentive by $2,000 come tax season.

Tax credit for $25,000 solar/battery project

Keep in mind, the incentive is based on the tax year the project is installed and deemed operational. Consult a tax professional with questions about the solar tax credit.

“Hold your horses, what if I already installed solar this year?”

More good news. If you already had solar or battery installed in tax year 2022, you’ll get the 30% tax credit instead of 26%. To quote the bill exactly:

“In the case of property placed in service after December 31, 2021, and before January 1, 2033, 30 percent.”

If you are currently pending installation, or in the process of getting binding quotes on solar.com – you’ll be eligible for the current 26% and the additional 4%, for a total of 30% once the legislation passes. That’s an extra $1,000 on a $25,000 project.

Make sure to consult your tax professional regardless. If your contract says 26%, you should be getting 30%.

Home electrification incentives in the Inflation Reduction Act

For homeowners, the solar tax credit is just the tip of the iceberg when it comes to electrification incentives in the Inflation Reduction Act.

This historic climate bill creates incentives for appliance upgrades like heat pumps, stoves, and clothes dryers. It also includes incentives for non-appliance upgrades like insulation, wiring, and breaker boxes.

Here are the home electrification incentives Americans can take advantage of to lower their emissions and energy bills.

Tax deductions for electrification upgrades

Like the souped-up solar tax credit, the IRA offers a 30% tax credit for installing heat pump HVACs, heat pump water heaters, doors and windows, insulation, and upgrading breaker boxes.

There is a limit of $600 per item and up to $1,200 per household per year  – so plan accordingly. However, tax credits for heat pump water heaters and heat pump space heaters can be up to $2,000.

If the IRA passes, these incentives will be available from January 1, 2023 until at least the end of 2032.

See how much a heat pump water heater can lower your energy bill.

Electrification rebates for low- and moderate-income households

The High Efficiency Electric Home Rebate Act (HEEHRA) may be a terrible acronym, but it’s a wonderful opportunity for low- and moderate-income households to get up to $14,000 in rebates for electric appliances and home upgrades that will, in turn, reduce their energy bill.

Unlike tax credits, which take effect in the following tax year, these point-of-sale rebates effectively reduce the upfront cost of home electrification upgrades. This section of the IRA offers $4.5 billion in rebates that will enable around one million households to go electric.

Here are the High Efficiency Electric Home Rebate Act incentives:

HEEHRA limitations

The electrification rebates created by the IRA are reserved for low- to moderate-income households making less than 150% of their Area Median Income (AMI).

The rebates can cover 100% of the costs for low-income households (below 80% AMI), and up to 50% of the cost for moderate-income households (80% to 150% AMI).

Electric vehicle incentives in the Inflation Reduction Act

Electric vehicles (EVs) are not only much cleaner than combustion engine vehicles, they are much cheaper to operate. Rewiring America found that the operating cost of an EV is around $1 a gallon – far less than even the most efficient gas car.

Like most electrification products, the hurdle to EV adoption is the upfront cost.

Fortunately, the Inflation Reduction Act features a Clean Vehicle credit for up to $7,500 on new EVs and $4,000 for used EVs (up to 30% of the price) beginning January 2023 and lasting until the end of 2032.

Clean Vehicle credit in the Inflation Reduction Act

Better yet, these tax credits can be transferred to dealers at point-of-sale. That means you can use the credit to reduce the purchase price of the car instead of waiting until tax season to apply it.

However, not all buyers and vehicles will qualify for the tax credit. We’ll give a high-level overview of the qualifications below, but the upshot is that the Clean Vehicle credit is designed to encourage local EV manufacturing and offer assistance to EV buyers that need it.

Clean Vehicle credit income limits

The maximum income to qualify for Clean Vehicle credit for a new EV is $150,000 per year, or $300,000 for joint filers.

For used EVs, the maximum qualifying income is $75,000 per year, or $150,000 for joint filers.

Clean Vehicle credit price limits

The IRA sets a maximum manufacturer’s suggested retail price (MSRP) for vehicles that qualify for the Clean Vehicle credit. The limits are as follows:

It’s important to note that used vehicles must be sold by a dealer and the credit only applies to the first time a car is resold. Ask about these stipulations ahead of time to make sure the Clean Vehicle tax credit applies to your purchase.

Manufacturing requirements

Finally, there are requirements for where certain parts (namely batteries) of qualifying vehicles are sourced and assembled.

Initially, the IRA requires 50% of battery components to be made or assembled in North America. This percentage steps up gradually before reaching 100% in 2029.

It also stipulates that a certain percentage of battery minerals must come from free trade partners or must be recycled in North America. That percentage begins at 40% in 2023 and steps up to 80% by 2027.

These requirements may limit the amount of EV models that qualify for the tax credit, but are designed to position America as a leader in EV and battery technology, which benefits consumers in the long run.

Indirect benefits for consumers

Not only is this a massive win for Americans looking to purchase solar, EVs, and heat pumps, but the innovation and investments such legislation generates will change how we consume electricity for decades to come.

Innovating in the renewables industry

More incentive to purchase solar will naturally increase the demand, fostering better equipment, installation experiences, and electrification technology.

“This is the type of far-reaching climate impact legislation that Americans, and specifically the clean energy industry, have been waiting for since helping to elect President Joe Biden and winning voting control in both the House and the Senate. If the IRA is passed into law it will provide broad, long-term support which provides investors and businesses with assurance of market regulations and incentives to spur major long-term investments broadly across many industries. This is great for the climate and for the economy.” – Kyle Cherrick, VP of Business Development, Solar.com

It also paves the way to grid parity, which essentially happens when solar or other renewable energy sources are less or equal in cost when compared to conventional energy sources like coal or other fossil fuels.

Job growth in the renewables industry

Let’s also not forget the job growth projected in the next decade or so. According to the bureau of labor statistics, demand for solar photovoltaic installers is projected to increase 52.1 percent between 2020 and 2030, as one of the fastest growing industries.

“As demand for solar and wind energy generation increases over the next 10 years, solar and wind energy infrastructure will need to be put in place. This requires a variety of workers, including solar PV installers and wind techs. Over 50 percent more of these workers are projected to be needed by 2029” [bls.gov]

We suspect this will likely amplify further due to the Inflation Reduction Act.

The time for home electrification is now

From the sticker shock of a gallon of milk to the heart-pulsating feeling as you open your electricity bill, inflation has hit a 40-year high, and we are all feeling it.

Energy, in general, has seen a 12-month spike of 41.6%, the highest since 1980 after the fallout of the 1979 oil crisis. More specifically, electricity has suffered a 13.7% increase in the past 12 months — the highest since 2006.

The cold hard truth is that energy will continue to get more expensive, especially as the U.S. unofficially enters a recession.

So even though the IRA extends the 30% tax credit until 2032, there are still three main reasons to install solar as soon as possible.

1. To hedge against inflation and rising energy costs
2. To start working toward energy savings (the longer you have solar, the more you save)
3. To get ahead of net metering and rate changes proposed by major utilities (more details on that here)

Sustainable energies like solar are key to reducing the consumer burden of inflation, hence why it was included in the Inflation Reduction Act of 2022. The sooner you go solar, the more it will hedge against rising energy costs.

The sun isn’t going anywhere anytime soon, and apparently neither is the 30% solar tax credit. Even so, there are still plenty of reasons to have a sense of urgency about investing in solar.