Protect your home against the extreme summer heat AND save on taxes too!

Protect your home against the extreme summer heat AND save on taxes too!

2023 is on track to be one of the hottest years on record.  Here in Austin, we set a new all-time heat record of 10 days in a row with temperatures of 105 degrees or above.  This extreme heat might be wreaking havoc on your air conditioner and utility bill.  If you’re considering improving your home’s cooling system efficiency, now might be the perfect time to take advantage of several tax credits worth thousands of dollars. 

Inflation Reduction Act

Passed in 2022, the Inflation Reduction Act was primarily designed to lessen the impact of inflation, however it also included several provisions to help fight climate change.  It expanded and renewed the Energy Efficient Home Improvement and the Residential Clean Energy Tax Credits.  The program started on January 1, 2023, and will start to phase down on December 31, 2032.    

Here are four ways you can utilize the energy credits and protect your home against the extreme heat. 

  1. Install a New Cooling System

For central air conditioners, you can claim 30% of the project cost as a tax credit, not to exceed $600.  This includes Split systems that are ENERGY STAR certified and have a SEER2 (Seasonal Energy Efficiency Ratio 2) rating of > 16 and any ENERGY STAR certified Packaged system. Air conditioners are subject to a $1,200/year cap.  I will discuss this in more detail later in the article.

For even bigger tax savings, consider installing a heat pump.  Although it sounds as if it will be heating your home, a heat pump is actually an extremely efficient technology for cooling your home.  There are specific energy efficiency ratings that must be met to qualify for the credit.  You can claim 30% of the project cost, up to a $2,000 maximum credit.  For the Rolls-Royce of HVAC technology, the geothermal heat pump, there is no cap on the 30% credit. 

Heat pumps may be eligible for state rebates through the High Efficiency Electric Home Rebate Act (HEERA).  To qualify, households must earn a total annual income that is less than 150% of your area’s median income (AMI).  You can use this tool to plug in your address and see your specific AMI:  Households with an annual income below 80% of their AMI can receive rebates that cover 100% of the total project cost. Households that earn 80% to 150% of their AMI can receive rebates up to 50% of the final project costIn some cases, the rebate could be as much as $14,000.

  1. Replace Old Windows

Windows and skylights that meet ENERGY STAR’s most efficient requirements can qualify for 30% of the project cost, up to a $600 maximum credit.  Subject to a $1,200 annual cap.

  1. Upgrade Exterior Doors

Exterior doors can add more than curb appeal by helping you save on utility bills and combating energy transference.  You can expect a credit of 30%, up to $500 ($250 for each door) per year.

  1. Add Insulation to your Exterior Walls and Attic

Insulation is the best possible starting point to create efficient year-round comfort.  Typical bulk insulation products can qualify such as batts, rolls, blow-in fibers, rigid boards, expanding spray foam and pour in place.  Many products that air seal to reduce leaks can also qualify, including weather stripping, house wrap, spray foam in a can and caulk designed to air seal.  These additions can qualify for a credit of 30% of the project cost, up to a maximum of $1,200 per year.

Energy Efficiency Ratings Qualifications

It is important to note that the energy efficiency ratings only apply for the current year and may increase in the future. Specific wording in the tax code states that units only qualify for the tax credit if they “meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the year in which the property is placed in service.”The Department of Energy has compiled a database of product models so you can easily lookup energy ratings and eligibility here:

Qualifying Homes

These tax credits are not available for newly constructed homes or rentals.  They are only for an existing home or an addition to or renovation of an existing home.  Be sure and check with your Tax Advisor for eligibility related to second homes or homes used partially for business purposes, as it is intended for primary residences. 

Credit Limits

According to the IRS2, the maximum credit you can claim each year is $3,200 as outlined below:

●     $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)

●     $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers

There is no lifetime limit for either credit and credits are determined on a yearly basis.  We recommend spacing out your improvements over multiple years to reach the maximum annual limit since there is no tax credit carryforward for energy efficient improvements.    

In addition to these great Federal Tax credits related to the Inflation Reduction Act, your local utility company or state may also offer rebates on your new energy efficient home improvements.  Be sure and subtract your public utility (not state) rebates from the qualified expenses of the clean energy property you purchased and installed.  It is equally important to keep good records of your purchases and installation contracts related to these home improvements.  Combining all of these money savings strategies with your energy efficient home improvement projects should help keep both your wallet and home as cool as a cucumber for summer while you transition to clean energy options.


About Author

Rachel Roth

Rachel Roth joined our family in April 2019 and brings over 20 years of experience to our team here at ML&R Wealth Management. Rachel values client relationships and world-class service. From long-term planning to day-to-day needs, Rachel takes pride in her attention to detail and careful analysis of each unique situation, understanding that the wealth management process is different for each client.

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