How the Inflation Reduction Act can help you save cash and energy

Government incentives might encourage you to add another goal to your new year’s resolutions in 2023: reducing your carbon footprint. Starting this year, Americans can take advantage of a stream of tax credits to make their homes, cars, and businesses more sustainable thanks to the Inflation Reduction Act (IRA).

The new legislation narrowly passed Congress after a lengthy political battle in the Senate last August. Considered one of President Biden’s signature achievements, the $440 billion package provides money for clean energy and lowers drug costs for older people, among other things. The government plans to pay for the credits through raising taxes on corporations that make over $1 billion in profit per year, taxing stock buybacks and investing in the Internal Revenue Services to catch tax cheats. If all works out as planned, the package will actually bring in $300 billion extra dollars, which will go towards paying off government debt.

Climate policy experts like Rachel Cleetus, the policy director for the climate and energy program at the Union of Concerned Scientists, see the IRA as the stimulus the country needs to make America’s energy infrastructure more sustainable, even if it’s just an initial step to meeting emission reduction goals. Cleetus says the law is the culmination of years of work.

“It’s a moment of relief, more than anything else,” she says. “Clean energy is already so competitive in the marketplace, here in the US and around the world, and this will really tip the scales in favor of accelerating that momentum around renewable energy, wind, solar, etc.”

With a receipt and tax form, consumers can save up to thousands of dollars on everything from electric cars to solar panels to two-pane windows. As you take stock of your sustainability resolutions this year, review how to apply for IRA credits.

“By being proactive, consumers can have a plan to make the most cost-effective upgrades for their specific housing and local policy circumstances once IRA funding is made available,” says Dan Esposito, a senior policy analyst at the an energy and climate policy think tank, Energy Innovation.

What are the tax credits?

There are two main buckets of credits you might qualify for: electric vehicle credits and home improvement credits. The first is purchasing an electric vehicle. To reap maximum benefits from the credits, you’ll want to make sure that it complies with a long list of technical and trade manufacturing requirements, like making sure the vehicle’s final assembly was in a US facility. 

Consumers should pay special attention to electric vehicle credits because they will most likely give buyers “the biggest bang for their buck,” Esposito wrote in an email to PopSci. A new electric vehicle can qualify for up to a $7,500 credit and used vehicles could be $4,000. (You can find more details about IRA tax credits from electric vehicles in our guide.) 

“The tax credits for electric vehicles are generally most impactful in terms of reducing one’s climate footprint, as the average US passenger vehicle emits roughly 60 percent more greenhouse gases than the average US home using natural gas,” he says. “However, the [exact] climate benefit depends on several factors, such as the vehicle you currently have (hybrid vs. gas guzzler), how often you drive, the climate you live in, and your home’s insulation,” Esposito writes.  

[Related: Check before you buy: Here are the new EVs that qualify for the clean vehicle tax credit]

The second bucket of IRA credits can be collected by reducing your home’s emissions through switching to renewable energy and making it more energy efficient. Consumers can save money on a range of products designed to reduce their home’s reliance on fossil fuels. You can get money for putting a solar panel on your roof. You can also get money from buying energy efficient products like two-pane windows that better insulate your house. You can also receive a $300 tax credit for purchasing a heat pump, instead of the typical furnace or energy inefficient air conditioners that most Americans own. 

If you plan to replace both the furnace and an air conditioning unit, then the tax credit for heat pumps could be worthwhile as well. How much you actually get back in credits, however, will vary from house to house—wiring might need to be upgraded or a heat pump designed to tolerate colder climates. “The timing of when these credits will become available will vary by state, with state energy offices set to play the dominant role in facilitating their rollout,” Esposito writes. “In the meantime, homeowners can assess the state of their house to determine which upgrades to seek out in the coming years.”

While renters might be locked out of some credits that require home ownership, they are still eligible for many incentives. It might be worth it to make the long-term investments if they plan to stay in their rental space for a year or more, Cleetus says.

[Related: How heat pumps can help fight global warming]

“The question for renters is obviously, how long are you going to be in a place? And is that something that you and your landlord want to split the cost?” she says. “In some cases, you can recoup the cost within a year, so even if you’re renting for just a year, it might make sense to do it.”

For example, it might make sense to purchase a more energy efficient air conditioner that will save you money on heating and cooling bills in the long run. And with the insulation-related tax credits, you can recoup the cost faster, perhaps in a year or two, than you would otherwise, according to Cleetus.

What to know before filing for the credits

Consumers should research what tax credits they can take advantage of before they buy any green products, says Susan Allen, senior manager for tax practice and ethics with the American Institute of Certified Professional Accountants (CPA). 

The amount of money you get will differ depending on your income, the number of dependents you have, and if you rent or own your home, so it’s important to do your research before buying anything that could have a tax credit or an upfront discount, Cleetus and Allen say.

“Planning before you buy helps you make the most informed decision on the ultimate savings you can accomplish,” Allen says. “If you can work with a CPA tax or financial planner, wonderful. They can help guide you and maybe save a lot of time and headache while you might be trying to navigate it.”

One of the best ways to make sure you can cash in on the credits is to ask the manufacturer before you make a purchase, Allen says. Car dealers will be aware of which vehicles qualify for the credits and appliance companies that manufacture electric stoves or other green products will likely know how much you can save. 

Cleetus says stores should start adopting labels that indicate if a product is eligible for tax credits. “That’s the kind of thing that will be really impactful, so that people don’t have to search,” she says. 

[Related: The Inflation Reduction Act and CHIPS could kick US climate policy back into action]

If you don’t have an accountant, you can also take advantage of a number of government guides, Allen and Cleetus say. Consumers can refer to the White House’s interactive clean energy website, which helps users determine what credits are available to them. The Department of Energy published a list of the credits people can save specifically on green energy and energy-efficient household appliances. The Internal Revenue Services details the cars eligible for electric vehicle credits. For those who want a more thorough breakdown of the credits, the White House also published a 183-page guidebook. And further guidance is still coming out, Cleetus says. 

And while the tax credits can help you save money on clean energy investments, the IRA doesn’t quite live up to what the country promised during global climate negotiations.The US pledged to reduce greenhouse gas emissions by 50 to 52 percent by 2030. The package aims to reduce emissions by about 40 percent. “It’s not enough, for sure. From a science perspective, we know we have to go further, faster,” Cleetus says. 

Still, the IRA is a vital step in accelerating the nationwide transition to clean energy infrastructure. “It’s important to think about this in a holistic way,” Cleetus says. “These tax credits will go a long way towards many, many households lowering their carbon footprint. But they’re also part of a broader system that has to shift.”