The Inflation Reduction Act's clean energy tax breaks have been more popular than anticipated, with U.S. households claiming $8.4 billion in credits for 2023, according to officials.

• The Inflation Reduction Act expanded and improved two tax incentives for energy-efficient homes.
• The popularity of the residential clean energy credit and energy efficient home improvement credit exceeded federal officials' projections.
• Officials stated that tax credits help lower annual utility bills and reduce greenhouse gas emissions by decreasing costs for home efficiency upgrades.

In 2023, American consumers claimed $8.4 billion in tax breaks from the Inflation Reduction Act for improving their home's energy efficiency, exceeding officials' projections.

Over 3.4 million American households claimed at least one of two tax breaks - the residential clean energy credit and the energy efficient home improvement credit - on their 2023 tax returns, according to the IRS.

The tax breaks aim to reduce the cost of purchasing rooftop solar panels, electric heat pumps, and other energy-efficient technologies, while simultaneously decreasing household greenhouse-gas emissions that contribute to global warming and lowering long-term utility bills for consumers.

According to a U.S. Treasury Department analysis, the average household received a $5,866 combined credit for residential clean energy and energy-efficient home improvements.

According to IRS data, the top five states for claims were California, Florida, New York, Pennsylvania, and Texas.

Tax returns filed and processed through May 23, 2024, were included in the IRS data.

Their value exceeded estimates

The Inflation Reduction Act, signed by President Joe Biden in 2022, extended and increased the value of tax breaks that existed prior to the law.

According to Deputy Treasury Secretary Wally Adeyemo, the tax breaks for 2023 have been more popular than expected, with the first full year of implementation.

Treasury officials used a Joint Committee on Taxation estimate for fiscal year 2024 to demonstrate the popularity of their proposal.

The IRS reported that the two tax breaks would cost approximately $2.4 billion in 2024, which is about 25% of the amount projected by the congressional tax scorekeeper.

The number of taxpayers who claimed the credits increased by about a third relative to 2021, before the Inflation Reduction Act, the Treasury Department said. The aggregate value of the credits also increased by almost two-thirds, it said.

Adeyemo expects uptake will continue to grow.

The Inflation Reduction Act's impacts are only beginning to show, he stated.

How the tax credits work

Up to 30% of the expenses incurred on installing rooftop solar panels, battery storage, and wind turbines can be reimbursed through the residential clean energy credit.

According to IRS data, 1.2 million households claimed a credit worth $6.3 billion in 2023.

According to the Treasury Department, approximately 752,000 of the claims were related to rooftop solar installations.

According to the Center for Sustainable Energy, the average cost of a 5-kilowatt residential photovoltaic system ranges from $10,000 to $15,000 before tax credits or incentives.

Climate change is causing neighborhoods to become more expensive.

The home improvement credit is also worth up to 30% of the cost of home-efficiency projects, up to $1,200 total per year.

Some projects that can improve energy efficiency in a home include installing energy-efficient windows and skylights, efficient exterior doors, insulation and air-sealing materials or systems, electric heat pumps, and conducting a home energy audit to determine the most effective projects to undertake.

Consumers can receive a maximum of $600 annually for windows and skylights and $500 for doors under certain projects.

Electric heat pumps are not subject to the yearly cap: Customers can receive up to $2,000 annually for these initiatives.

According to the American Society of Home Inspectors, the average cost of installing a heat pump in 2023 is $5,500. This technology, which both heats and cools a home, is highly energy efficient and can result in enough energy savings to pay for itself in as little as two years.

Almost 700,000 taxpayers each claimed the credit for adding home insulation and windows and skylights, totaling $2.1 billion in taxpayer funds.

The two tax breaks make efficient technologies more accessible to consumers, said Kara Saul-Rinaldi, president and CEO of AnnDyl Policy Group.

She stated that efficiency projects can help consumers save money on energy bills in the long run.

The U.S. Department of Energy estimates that American households spend an average of $2,000 annually on energy, with $200 to $400 potentially being wasted due to drafts, air leaks around openings, and outdated heating and cooling systems.

The distribution of the tax credits

According to IRS data, only 2.5% of taxpayers claimed a credit for 2023, despite the tax breaks being more popular than anticipated.

According to the Treasury Department, nearly half of the 3.4 million households that received a tax break in 2023 had incomes of $100,000 or less.

According to IRS data, 66% of the $8.4 billion in tax breaks went to individuals earning more than $100,000 per year, totaling about $5.5 billion.

Saul-Rinaldi stated that the tax breaks are partly due to their structure.

To be eligible for the energy efficient home improvement credit, households must have a tax liability. Any tax-credit value exceeding their tax liability will not result in a refund from the IRS.

Those with higher incomes are more likely to have a greater tax obligation and thus can fully utilize the credit's benefits.

The residential clean energy credit is unique in that consumers who claim this tax break but have insufficient tax liability can carry forward any unused credits to future years to offset future taxes.

Saul-Rinaldi stated that lower earners will benefit more from separate energy-efficiency rebate programs currently being rolled out by states.