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Explainer: How Does the Inflation Reduction Act Affect Households?

Solar Installers

In Brief

Federal agencies are now issuing rules that define how developers and investors can tap Inflation Reduction Act money. 

How does the Act steer money to consumers, especially for home improvements and transportation? 

More and faster than you might think. This explainer highlights some IRA advantages for Americans across the income spectrum. 

This past summer, Congress passed the Inflation Reduction Act, endorsed by President Biden. The IRA’s provisions aim to incentivize investments in research and development of emission reduction technologies such as carbon capture, storage, and clean hydrogen. Credits against taxes due in the bill specifically favor domestic manufacturing. The law marks a watershed for federal support to renewable infrastructure and for renewables’ accessibility. Economists say its credits can steer $500 billion in tax incentives, grants, and loan guarantees. While the money is being directed towards reducing the country’s carbon footprint, how does this money affect the consumer on a household level?
Currently, clean electricity and transmission receive the most money from the IRA, with clean transportation in second place (followed by agriculture, then water). In order to confront the lack of equity in access to renewable energy, the act gives money toward projects in communities near polluting sites.  It also requires proof of “equity impacts” from many fund recipients. Tunneling to individual bank balances, the IRA provides $43 billion in tax incentives for the consumer broken down into tax credits and rebates. Some incentives only apply to those under a certain income level, while others have a designated cap. The incentives come in the form of direct pay, which means that any corporation or person who owes taxes can claim the tax credit. This means that the affordability of electric vehicles, energy-efficient home appliances, solar panels, geothermal heating and home batteries can increase dramatically for the consumer.
The IRA’s policies, while they may seem macroeconomic, will impact the day-to-day life of homeowners/renters, drivers and consumers. For equity reasons, some funds can only be received after proving to be below a certain income threshold. Let’s examine the most direct impacts of the IRA from the perspective of a consumer’s tax credits and rebates (which will take longer to go into effect) for purchasing goods and services that reduce their carbon footprint.
Your first step as someone who wants to claim the tax credits and rebates offered by the IRA would be to conduct a home energy audit. There are plenty of home energy audit companies, such as Canopy, that provide reliable services. Companies like Canopy will give you the necessary information on where and how your home can make energy improvements. Overall, you would qualify for a 30% tax credit from the Residential Clean Energy Tax Credit. They might suggest you install solar panels on your roof which would mean up to $9,000 saved on installation, and less time to see a return on investment as well. Your home audit also might suggest that you buy new, energy-efficient appliances, which have an annual $2000 cap through the RCE Tax Credit. These appliances include heat pumps, heat pump water heaters, biomass stoves and boilers, with a $600 cover cap per item. One stipulation is that the renovations must have been made to a non-commercial home, which also covers renters and multifamily buildings. Dallas Burtraw, a 2018-2019 visiting scholar at the Kleinman Center for Energy Policy at the University of Pennsylvania, estimates that on average per household, the net benefit under the IRA will be $1,000.
For lower to middle-income households, rebate programs for upgrading homes can make them more energy efficient. The Home Owner Management Energy Savings (HOMES) program rewards decreasing the energy consumption of your home through more efficient appliances. While technically all levels of income can qualify for this rebate, low-middle-income households will reap a higher rebate amount with the more energy they save—up to 80% of project costs can be covered. Specifically, households can claim $8,000 if energy use is cut by 35% and $4,000 if it is cut by 20%. These savings and improvements span $2,500 for electric wiring, $840 for purchases of electric stoves and $1,800 each for transitioning from a furnace to an electric heat pump, using a heat pump for water heating, solarizing a home and buying an electric vehicle. People who qualify for these rebates should also look into the High Efficiency Electric Rebate Act, which can entail up to $14,000 discounted for home electrification.
The tax incentives also apply to electric vehicles in an attempt to make them more affordable. The Clean Vehicle Credit extends an existing $7,500 credit for new car purchases and adds a $4,000 credit for buying used vehicles. A new requirement stipulates that new car purchases must have final assembly as well as critical mineral and battery sourcing in North America. This credit is being phased in, as demand for EV’s is already greater than supply. Last, there is additional credit of $1,000 for installing an alternative fuel vehicle refueling property in a principal residence.
If you happen to be in the business of building and selling a home, the IRA also offers credits of $2,500 for new homes that meet Energy Star efficiency standards. The credit goes up to $5,000 for new homes that are zero-energy ready homes. The credit applies to multifamily homes as well—$500 per unit for Energy Star homes and $1,000 per unit for zero-energy-ready homes. People who claim these credits must be ready to prove that they pay laborers building these homes prevailing wages.
Most consumers should feel the effects of the IRA in reduced electricity costs as well as cheaper goods and services. This may apply especially to lower-income households. When there is a reduced price for electricity,  a higher corporate tax aims to keep energy burdens lower for low-income households. While it is unlikely that you can qualify for all the tax credits and rebates at once, there are plenty of cost-saving incentives to begin making changes to your life. A hypothetical family can claim $7,500 from EV tax credits, $14,000 from direct consumer rebates for energy-efficient appliances, 30% tax credit ($9,000) from solarizing roofs and a $500 drop in annual expenses from more efficient energy.  Some forecasters expect to see 950 million solar panels, 120,000 wind turbines and 2300 grid-scale battery plants by the year 2030. Homeowners, renters, and neighbors will see these changes play out on the streets they know.