Tax Treatment of Home Energy Rebates

The IRS has guided the federal income tax treatment of certain home energy rebates offered by states, with funds provided by the U.S. Department of Energy (DOE).

Background

The Inflation Reduction Act of 2022 created two rebate programs. These programs support home energy efficiency retrofits and home electrification or appliance upgrades.

State energy offices will administer the rebate programs. The U.S. Department of Energy will provide guidance and oversight.

For a home energy efficiency retrofit with at least 20% predicted energy savings, a rebate may be available. Households may receive up to 80% of project costs, capped at $4,000. If household income exceeds 80% of area median income (AMI), the rebate is reduced. In that case, it covers up to 50% of project costs, with a maximum of $2,000.

For retrofit projects with at least 35% predicted energy savings, higher rebates may apply. Households may receive up to 80% of project costs, capped at $8,000. If household income is above 80% of AMI, the rebate is reduced to 50% of project costs. In that situation, the maximum rebate is $4,000.

A separate rebate is available for home electrification and appliance projects. This rebate may cover up to 100% of project costs, subject to specific technology limits. The total rebate amount cannot exceed $14,000 per household.

If household income exceeds 80% of AMI, the electrification rebate is reduced to 50% of project costs. The rebate is not available at all if household income exceeds 150% of AMI.

Technology-specific rebate caps vary by product. For example, the maximum rebate is $840 for an Energy Star electric stove. It can reach up to $8,000 for an Energy Star electric heat pump used for space heating and cooling.

Treatment of DOE home energy rebates to purchasers

A rebate paid to or on behalf of a purchaser pursuant to either of the DOE home energy rebate programs is not includible in the purchaser's gross income. However, it will be treated as a purchase price adjustment for the purchaser for federal income tax purposes.

To the extent the rebate is provided at the time of sale, the rebate is not included in the purchaser's cost (or tax) basis in the property. To the extent the rebate is provided later, the tax basis is reduced.

Treatment of DOE home energy rebates to certain business taxpayers

Payments of rebate amounts made directly to a business taxpayer, such as a contractor, in connection with the business taxpayer's sale of goods or provision of services to a purchaser are includable in the business taxpayer's income.

Coordination of DOE home energy rebates with the energy efficient home improvement credit

In some cases, a taxpayer can receive an energy efficient home improvement credit for federal income tax purposes. The credit is for 30% of amounts paid for certain qualified expenditures, with limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The maximum annual credit amount may be up to $3,200.

If the taxpayer receives a DOE home energy rebate (whether at the time of sale or later), the amount of qualified expenditures used to calculate the energy efficient home improvement credit must be reduced by the amount of the rebate. If the taxpayer purchases items eligible for both the DOE home energy rebate and the energy efficient home improvement credit, the taxpayer can make a pro rata allocation of amounts received as rebates to the individually itemized expenditures as a share of total project cost in determining the amounts treated as paid or incurred for such items for purpose of the various limits on costs under the energy efficient home improvement credit.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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