Sustainability Spotlight - September 2023 - How Can You Take Advantage of the Inflation Reduction Act?

Are $1800 per year household savings and $26,500 for a new EV of interest to you?

The Inflation Reduction Act (IRA) provides a number of tax incentives to increase home energy efficiency and reduce air pollution from transportation. The household energy savings could total a typical $1800 per year if the homeowner takes advantage of most available incentives. The vehicle incentives could amount to $26,500 on a less expensive vehicle if the purchaser does not exceed the income limits. While taking advantage of these savings, citizens also would be contributing to solving the increasing risks of extreme weather that locally include drought, wildfire, and the health impacts of extreme heat and ozone pollution, not to mention other extreme weather risks elsewhere.

The $1800 per year household savings come from the following incentives.

The Energy Efficient Home Improvement Credit (26 U.S. Code § 25C) allows households to deduct from their taxes up to 30% of the cost of upgrades to their home including installing energy efficient equipment such as heat pumps, cook stoves (electric induction cook-tops boil water faster than gas stoves), home insulation, doors and windows, and upgrading breaker boxes to accommodate additional electric load.

These deductions are limited to $600 per measure, up to $1,200 per household per year—except the limit is $2,000 for buying and installing a heat pump for hot water or heat pump for their home heating and cooling. Energy Smart Colorado adds to the federal incentives with tax credits and rebates for heat pumps, home electrification and appliances. Xcel Energy offers another $600-800 rebate for heat pump water heaters.

The Colorado Energy Office and Denver Regional Council of Governments are applying for grants from the Department of Energy that will provide additional rebates to middle/low-income households for energy saving retrofits and high-efficiency electric home appliances. The rebates will be much more generous than the current tax credits, and so significantly increase the estimated $1,800 per year household savings.

These incentives are most important if you currently are faced with an impending replacement of household equipment for heating, cooling, and cooking. Such replacements have a life of 25 years, and so it would be good timing to replace aging equipment with cost-saving modern equipment.

The Residential Clean Energy Credit (26 U.S. Code § 25D), re-ups an existing program allowing households installing solar to deduct 30% of the cost of the project from their taxes. This credit includes residential battery storage. Energy Smart Colorado also offers a 30% tax credit for roof top solar.

If you are also a business owner, 26 U.S. Code § 179D provides a tax deduction for energy efficiency improvements to commercial buildings, such as improvements to interior lighting, heating, cooling, ventilation, and hot water. The deduction is $0.50-$1 per square foot of building, depending on the efficiency increase.