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Federal Govt’s Inflation Reduction Act (IRA)
Under the Federal Government's Inflation Reduction Act (IRA), the updated 25C Federal Tax Credit for Residential Energy Property became effective on January 1st, 2023.
One key benefit of the IRA is the special tax credit for heat pumps used for heating, allowing homeowners to claim 30% of the installation cost, up to $2,000. To put this in perspective, the maximum federal tax credit for a central AC system is $600, which is double what it used to be. Remember, a tax credit is different from a tax deduction—it directly reduces your federal tax bill. For example, if you owe $10,000 in taxes, a $2,000 tax credit would lower your total bill to $8,000. It’s like getting a $2,000 contribution from the government towards your new heat pump installation!
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Property Placed In Service After 12/31/2022
H.R. 5376 of 2022 updated the tax credit value to 30% of the cost for eligible items or improvements, each with its own cap. Homeowners can claim up to $1,200 annually in tax credits, with some exceptions.Building Envelope ImprovementsExisting homeowners can receive a 30% tax credit for upgrading the home’s building envelope. Labor costs are excluded, and improvements must meet specified efficiency standards. Eligible upgrades include:- Exterior windows and skylights: $600 per year, must meet Energy Star’s highest efficiency certification.
- Exterior doors: $250 per door, up to $500 annually, meeting applicable Energy Star requirements.
- Insulation and air-sealing materials: $1,200 per year, must meet the latest International Energy Conservation Code standards.
- Heat pumps and heat pump water heaters: $2,000 maximum credit
- Biomass stoves: $2,000 maximum credit, with at least 75% thermal efficiency
- Central air conditioners, water heaters, furnaces, and boilers: Must meet efficiency criteria.
- Electrical upgrades: Panelboard and circuit improvements installed alongside energy-efficient upgrades must meet National Electric Code standards and have a capacity of at least 200 amps.
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