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American consumers claimed $8.4 billion of Inflation Reduction Act tax breaks tied to boosting the energy efficiency of their homes in 2023, according to Internal Revenue Service data, a sum that exceeded officials’ projections.
More than 3.4 million U.S. households claimed at least one of two tax breaks on their 2023 tax returns — the residential clean energy credit and the energy efficient home improvement credit — the IRS reported Wednesday.
The tax breaks aim to reduce the cost of buying rooftop solar panels, electric heat pumps and other energy-efficient technologies, while also cutting the household greenhouse-gas emissions that contribute to global warming and helping lower long-term utility bills for consumers.
The average household got a $5,084 tax break via the residential clean energy credit and $882 from the energy efficient home improvement credit, according to a U.S. Treasury Department analysis.
California, Florida, New York, Pennsylvania and Texas were the top five states for claims, IRS data showed.
IRS data was for tax returns filed and processed through May 23, 2024.
Their value exceeded estimates
These tax breaks existed before the Inflation Reduction Act. However, the law, which President Biden signed in 2022, extended them for a decade and raised their value for taxpayers.
The tax breaks have proven more popular than initially projected for 2023, the first full year for which the tax benefits were in effect, Deputy Treasury Secretary Wally Adeyemo said on a press call Tuesday.
Treasury officials pointed to a Joint Committee on Taxation estimate for fiscal-year 2024 to illustrate their popularity.
The congressional tax scorekeeper had projected the two tax breaks would cost a combined $2.4 billion that year — roughly 25% of the amount reported Wednesday by the IRS.
Additionally, 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.
“In many ways the impacts of the [Inflation Reduction Act] are just getting started,” he said.
How the tax credits works
The residential clean energy credit allows consumers to recoup up to 30% of the costs of installing rooftop solar panels, battery storage and wind turbines, for example.
About 1.2 million households claimed this credit in 2023, for a total $6.3 billion, according to IRS data.
The bulk of those claims — about 752,000 — were for rooftop solar installations, according to the Treasury Department.
The average 5-kilowatt residential photovoltaic system costs roughly $10,000 to $15,000 before tax credits or incentives, according to the Center for Sustainable Energy.
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The energy efficient home improvement credit is also worth up to 30% of the cost of home-efficiency projects, up to $1,200 total per year.
Such projects include installing energy-efficient windows and skylights, efficient exterior doors, insulation and air-sealing materials or systems, electric heat pumps, and having a home energy audit to help determine the best projects to undertake.
It carries dollar caps for specific projects.
For example, consumers can get up to $600 a year for windows and skylights and $500 for doors. There’s an exception for electric heat pumps: Consumers can get up to $2,000 a year for such projects.
Heat pumps cost $5,500 to install in 2023, on average, according to the American Society of Home Inspectors. The technology, which heats and cools a home, is “highly energy efficient” and can yield enough energy savings to pay for themselves in as few as two years, the group said.
More consumers — 2.3 million — claimed this credit, for a total $2.1 billion. The most popular projects were adding home insulation and windows and skylights, each claimed by almost 700,000 taxpayers.
Together, the two tax breaks make efficient technologies — which can be “large, expensive purchases” — “more accessible” to consumers, said Kara Saul-Rinaldi, president and CEO of AnnDyl Policy Group, an energy and environmental policy strategy firm.
Efficiency projects can help consumers save money on energy bills over the long term, she added.
For example, the average person spends $2,000 annually on energy, and $200 to $400 may be “going to waste” from drafts, air leaks around openings and outdated heating and cooling systems, according to the U.S. Department of Energy.
The distribution of the tax credits
While the tax breaks have been more popular than expected, just 2.5% of taxpayers claimed a credit in 2023, according to IRS data.
Almost half of the 3.4 million households that claimed a tax break in 2023 had incomes of $100,000 or less, according to the Treasury Department.
However, about $5.5 billion — or 66% — of the total $8.4 billion of tax breaks accrued to those making more than $100,000 a year, IRS data showed.
That’s partly attributable to the way in which these tax breaks are structured, Saul-Rinaldi said.
For example, the energy efficient home improvement credit is nonrefundable. Households must have a tax liability to get the tax break, and the IRS won’t issue a refund for any tax-credit value that exceeds their tax liability.
Higher earners are more likely to have a tax liability, and therefore benefit from the credit’s full value.
The residential clean energy credit is a bit different. Consumers who claim this tax break but have an insufficient tax liability to benefit can carry forward any unused credits to future years to offset future taxes.
Lower earners will be able to benefit more from separate energy-efficiency rebate programs currently being rolled out by states, Saul-Rinaldi said.
