2023 is the year of the Inflation Reduction Act

Act fast to maximize the EV tax credit, and start planning your home’s energy makeover. 

Thanks to the Inflation Reduction Act of 2022, which was signed into law last August, a host of new federal tax breaks came into effect on Jan. 1 of this year.

This is great news if you’re thinking of buying an electric vehicle or making your home more energy-efficient, because you can now potentially get thousands of dollars in help from Uncle Sam. But the way the programs are rolling out is far from simple, so Garfield Clean Energy is here to provide some consumer advice!

The IRA is a massive piece of legislation that provides $391 billion over 10 years to stimulate investment in clean energy and infrastructure, along with other measures. The parts of the law that will directly benefit us regular folks fall into two categories: tax credits and rebates.

The EV tax credit opportunity

Let’s start with the tax credits, since they’re the part of the law that took effect Jan. 1. We’ll first consider the tax credit on EVs, because there’s a quirk that may make it less valuable in a few weeks’ time. (Update 4/5/23: the new rules on tax credits discussed in the following paragraphs are now set to take effect on April 18. See this article for details.)

Before Jan. 1, you could get up to $7,500 back on your federal taxes if you bought a new EV – except not if it was a Tesla or GM vehicle, because those manufacturers had exceeded their sales quotas of tax-credit-eligible EVs. Now, thanks to the Inflation Reduction Act, the EV tax credit has been extended for another 10 years and the quota system has been dropped.

So, particularly if you’ve been jonesing for a Tesla or a Chevy Bolt – EVs that had lost their tax credit eligibility – this amounts to a nice extra incentive. But act fast, because there’s a catch.

The Inflation Reduction Act specifies that the exact amount of the EV tax credit depends on how much of the battery components were sourced and assembled in the US. Industry observers are concerned that many or even most EVs currently on the market won’t meet the IRA’s thresholds and therefore won’t qualify for the full tax credit. The IRS isn’t expected to issue guidance on this matter until sometime in March, however, and in the meantime all EVs assembled in North America and priced at less than $55,000 ($80,000 for SUVs and pickups) are presumed to be eligible.

Thus, there’s a short-term grace period for those ready to pull the trigger right now. But be sure to confirm with the dealership that the model you’re looking at is indeed eligible. For additional details, see this article.

If you don’t manage to buy an EV before that window closes, you still might want to hustle to buy in 2023 because the IRA’s sourcing and assembly requirements will only get more stringent in subsequent years.

In addition, you can claim a $2,000 state tax credit when you buy a new EV. And unlike the federal tax credit – which can’t exceed your tax liability for the year, and is only available if your adjusted gross income is under $150,000 (or $300,000 for joint filers) – the state credit is a flat $2,000 regardless of your tax situation.

Meanwhile, in a welcome move, the IRA now provides a tax credit on used EVs for the first time. The credit is 30% of the purchase price up to a max of $4,000. The vehicle must be at least two years old, sold by a qualifying dealership and priced under $25,000, and the purchaser’s adjusted gross income must be $75,000 or less ($150,000 for joint filers).

It’s also worth mentioning here that Xcel Energy customers who meet income qualifications can get a $5,500 rebate on a new EV or a $3,000 rebate on a used EV, although these rebates are not “stackable” with federal and state tax credits.

Finally, it’s looking like car dealerships will be allowed to claim the IRA tax credit on EVs that they lease. That should enable them to lower the base price of the vehicle by $7,500, thus lowering the lease rate (as is already typically done with the state’s $1,500 tax credit on leased EVs.)

What about home energy upgrades?

While the IRA uses tax credits to boost electric vehicle purchases, the big new money for home energy upgrades will be coming in the form of rebates. And we’re talking real money here – up to $14,000 per household per year.

These rebates aren’t expected to become available until later this year or early 2024, but that’s a good reason to start planning now.

We can expect a stampede of demand for contractors and equipment sometime this summer or fall, when the Colorado Energy Office announces a launch date for the High-Efficiency Electric Home Rebate Program in our state. If you want to be in the first wave – or if you’ve got a furnace you know needs replacing soon – you’ll want to secure your people and parts ahead of time.

That said, the program is set to continue through 2032, and the IRA allows you to claim rebates year after year. This is an excellent opportunity to develop a plan for upgrading your home or business in stages, probably starting with weatherization and insulation, then moving on to replacement of your oven, water heater and furnace, and potentially installing a home EV charger and solar panels. The rebates will make the upgrades affordable, and the upgrades, in turn, will save you money every month for years to come.

For now, the IRA offers 30% tax credits on three different classes of projects. The credit for clean-energy projects like solar, wind, geothermal and battery storage is an extremely valuable incentive, considering their high upfront costs. For the other two categories the tax credits are capped at pretty low levels, but still offer some relief: for home energy improvements you can get up to $1,200 back (or $2,000 for a heat pump), and up to $1,000 to install a home EV charger.

When the IRA’s High-Efficiency Electric Home rebates become available, the math on energy upgrades will get considerably more exciting. For example, it will be possible to get up to $8,000 off the price of a heat pump, $1,750 for a heat-pump water heater, $1,600 for insulation and air sealing, and $4,000 for an electrical panel upgrade. Note, however, households may earn no more than 150% of the Area Median Income to qualify (see our ReEnergize page for a 150% AMI chart for Garfield County).

The best part? You’ll be able to stack these federal rebates on top of rebates offered by our local utilities. Our energy coaches can provide free assistance in maximizing your savings.

Clean energy and energy efficiency will soon be more affordable than ever. So start planning!