How the huge new US climate law will save you money

Today President Joe Biden signed the Inflation Reduction Act, a massive piece of legislation that represents the largest investment in climate action in US history. It is investing nearly $400 billion to boost domestic production of clean energy technologies and broaden America’s ability to survive climate change. If all goes according to plan, the law would cut US emissions by 40 percent by 2030.

In the immortal words of Uncle Sam, the bill screams “I Want You”… to wage a war on climate change. The bill is packed with tax credits and rebates for Americans to buy electric vehicles (EVs), install heat pumps and better insulation, and put solar panels on their roofs. We’re talking thousands upon thousands of dollars per household. All of this additional investment in green technologies should, in turn, strengthen the market and further accelerate the transition to a cleaner economy.

“It’s basically just a big green light for everyone — for the consumer, for the companies that make these products, for building owners, for utilities, Everyone— to get started with this stuff,” says Ben Evans, federal legislative director of the US Green Building Council, a nonprofit organization that advocates for sustainability. “And we think that’s going to really change these markets. I don’t think calling this historic is an exaggeration.”

It’s a stealth way to encourage mass action on climate change: When homeowners in the US individually make their homes more efficient, together we will significantly reduce carbon emissions. One fifth of both national energy consumption and CO2 emissions2 Emissions come from households. “What this bill does in many ways is at least as much psychology as economics,” says Gernot Wagner, a climate economist at Columbia Business School. “You’re having your average conversation with your contractor about, wait a minute, with gas prices so damn high, should I really put a gas boiler in here?”

“The most obvious thing today,” Wagner adds, “is perhaps to spend a little bit more on things that literally pay for themselves in months. So you can save 50 percent on your electricity bill by better insulating the place.”

After failing to enact meaningful action on climate change with – heaven forbid – an actual phase-out of fossil fuels, the Feds have turned to tax legislation and used public money to fund the public good of mass decarbonization. Sure, taxes aren’t fun, and tax credits sound even more confusing. But actually it’s pretty easy for you to get your share of the Inflation Reduction Act.

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First off, a tax credit isn’t the same as a tax deduction – it’s even better. With the latter, you could reduce your taxable income from $65,000 to $60,000, for example. That means the government doesn’t get its share of that $5,000. In contrast, a tax credit would get you back the full $5,000. So if you owe the government $10,000 after filing taxes and you have a $5,000 loan, you only end up paying $5,000.

The Inflation Reduction Act provides tax breaks for energy-efficient renovations: new windows, doors, insulation, water heaters. So when you file your taxes, you get rebates on what you owe the federal authorities. “Let’s say you spend $1,000 on insulation — you could get a 30 percent tax credit on that,” says Evans. “So a $300 tax credit that goes directly against your tax bill. So at the end of the year, you owe $5,000 in taxes, you cancel that $300, and you only owe $4,700.”

That’s a significant increase from previous home improvement incentives, Evans says, which credited 10 percent of spend up to $500 your whole damn life. Now it’s 30 percent of purchases, a maximum tax credit of $1,200 per year starting January 1, 2023 and running through 2032. So you could be credited for new windows next year, insulation next year, leakproof ones next year doors and so on.

As for solar, the bill extends an existing federal tax credit that covers 30 percent of residential solar energy spending through 2032. That credit drops to 26 percent the following year, 22 percent in 2034, and expires at the end of this year .

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