The Inflation Reduction Act Is Now Law: Here's How to Actually Get the Money

President Biden signed the Inflation Reduction Act (IRA) into law in August 2022, which includes over $61 billion for investments in clean energy and other efforts to combat climate change. Some of this money is in the form of direct rebates and tax deductions for new energy-efficient appliances and vehicles as well as home energy upgrades — all things homeowners (and even renters, in some cases) can take advantage of.

"When you look at all the decisions you make as a homeowner, that accounts for roughly 42 percent of U.S. energy emissions," Sam Calisch, a special products lead at Rewiring America, a nonprofit that provided data and research to lawmakers for the IRA, tells Hunker. "It's actually a pretty big slice of the pie you have influence over. The Inflation Reduction Act and the measures in it have a bunch of stuff to help people make the right choices with respect to cutting down on their 42 percent of the emissions picture."

As a homeowner, it's likely you have some of these initial questions:

• What products and upgrades do IRA rebates cover?
• How much money am I eligible for, and how do I get it?
• How much money will upgrades save me in the long run?

Here, we'll take a look at all those questions as well as some basic concepts behind these government investments. For one thing, you might be curious as to why, after decades of moving toward natural gas for home heating (in many areas), the government wants you to go electric.

Given the energy waste and air pollution associated with conventional electricity production, it might seem odd that the government wants you to switch from gas-burning furnaces and water heaters to electric heat pump models. This is particularly the case in areas where natural gas is cheaper than electricity.

The reason is simple — in theory, at least; it's more complicated in practice: Renewable energy sources such as solar, wind, and hydro are used to generate "clean" electricity. The "clean" is a fair claim because this type of electricity production creates no carbon emissions, unlike electricity produced with fossil fuels like coal and natural gas.

Moving away from fossil fuels also means moving away from appliances that burn gas (including propane). Energy nerds will tell you that, as energy waste goes, burning natural gas in a home appliance is far more efficient than running a similar appliance with conventionally produced electricity (about 2/3 of the energy is lost in the process). But with clean electricity, production waste — as well as conventional measures of efficiency — doesn't really apply, since the energy source is the cost-free, infinite supply of the sun, wind, or water movement, as opposed to finite fossil resources mined from the earth.

So, step 1 in this particular climate battle is to get as many homeowners as possible to upgrade from fossil-fuel-based appliances (and cars) to new, more energy-efficient, electric models — an effort sometimes referred to as "electrification." Step 2 is to create an infrastructure to provide clean electricity to all households and cars. The Inflation Reduction Act addresses step 1.

There are two ways that the IRA saves consumers money on eliminating fossil-fuel-powered systems and appliances from your household:

• Point-of-sale rebates (referred to as the High Efficiency Electric Home Rebate Act, or HEEHRA, within the IRA)
• Tax deductions

"You can think of [the rebates] as just a discount right off the top of these things," Calisch tells Hunker. "It's not like you have to front the money and get paid back later. It comes right off the top of the price. It's in contrast to a tax credit where you have to pay the full cost, and you have to carry that cost through to tax season when you'll get paid back. A lot of households can't do that."

The point-of-sale rebates include a direct discount on the following:

So, who qualifies to get these discounts? These IRA rebates are specifically aimed at low- and moderate-income (LMI) households, and the amount of money you get is based on your household income as well as the appliances and upgrades you choose to buy or make.

If your household income is below 80 percent of AMI, or Area Median Income, (AMI x 0.8), you can receive the maximum amount of the improvement costs covered at 100 percent. If your household is considered moderate income (between 80 and 150 percent of AMI) then you will only receive up to 50 percent of the costs covered.

In addition to the direct point-of-sale rebates, the IRA gives homeowners an opportunity to eliminate fossil-fuel-powered appliances and systems in their homes via tax credit. "For the tax credits, this benefits people further up the tax bracket because they have tax liability. The incentive is a little weaker than the ones targeted for low- and moderate-income households, but it still covers a bunch of items," Calisch tells Hunker.

In other words: If you can't benefit from the direct point-of-sale rebates, you don't get to miss out entirely on the incentives for climate-friendly upgrades. Homeowners will receive a 30-percent tax credit on specific costs outlined in the IRA, with a $1,200 household cap per year (this includes both the parts and the installation). A notable exception to this is heat pumps: Households can deduct 30 percent of the costs for buying and installing a heat pump water heater or heat pump system for home heating and cooling — up to $2,000.

Here are tax deductions homeowners can receive for improvements:

The Inflation Reduction Act also allows households to deduct up to 30 percent of the costs of installing solar panels and residential battery storage systems with no cap.

All of these rebates and tax deductions are beneficial, but it's likely a lot of homeowners will be scratching their heads saying "How do I actually get the money?".

For the tax deductions, it's simple. You pay for the work, save your receipts, and you add it to your tax return. It should be noted that you won't receive any tax deductions on the outlined home upgrades until 2023, with the exception of solar panels, which are retroactive to 2022.

However, for the direct point-of-sale rebates, it's a bit more complicated and things are still in flux, according to Calisch.

"These are the parts that are yet to be determined and will likely vary state to state because this is a state-administered program and not going to be a federal-administered program," Calisch tells Hunker. "The Department of Energy is going to prepare guidance to the state energy offices to set up their programs. The Department of Energy is going to solicit opinions from all the people it can, and synthesize a best practice version of this. And that's going to happen pretty quickly here."

As of press time, there's no definitive answer to how this will look exactly, but the idea, Calisch says, is that consumers will have to pre-qualify for the rebates so that they won't have to pay any out-of-pocket costs. Likely, for most of these upgrades you'll be working with a contractor, who will have to check a box that says "yes, I am replacing a piece of fossil fuel equipment" and from there, they will knock the costs off the top of your bill.

One of the biggest incentives in the Inflation Reduction Act is for consumers to upgrade their gas water heater and HVAC systems to a heat pump — but what exactly is it?

You may have heard of heat pumps for home heating and cooling, but heat pump water heaters and clothes dryers are less well known. They all use the same basic principle to heat or cool things. They also work a lot like your refrigerator, which cools itself by removing heat from the inside and dumping it to the outside (that is, into your kitchen). And they do this with electricity.

All heat pump systems work by circulating refrigerant (what we used to know as Freon) from one place to another. The refrigerant is alternately compressed and allowed to expand, and in the process it transfers heat. To cool your house, a heat pump pulls heat from the indoor air and transfers it outdoors; to heat the house, the refrigerant draws heat from the outdoor air and brings it inside. Heat pump water heaters and clothes dryers do the same thing to heat water or dry clothes, and it's all done in an indoor environment.

So how do these refrigerator-y things save you money? By being more energy-efficient than their conventional counterparts, such as oil and gas furnaces or gas or conventional electric water heaters. How much they can save you depends on what type of appliances you have now and how much you pay for natural gas and electricity. In some areas, natural gas is cheaper than electricity, and switching to certain heat pump systems may actually increase your utility bill, but as the nation moves toward clean electricity, that's likely to change.

The efficiency of heat pump heating and cooling systems varies by climate (they're less efficient in places with very cold winters), but heat pump water heaters and dryers — because they stay in relatively constant indoor temperatures — can save most households money regardless of the local climate.

Even so, everyone should look at converting to heat pump heating and cooling, because this offers long-term savings in most areas, especially when you factor in the incentives offered through the IRA. Heat pumps come with the biggest incentives and are being advocated for most fervently because heating and cooling makes up the biggest piece of the home energy pie — close to 50 percent, on average.

Let's look at water heaters to compare lifetime costs. For a quick analysis, you simply need to look at the purchase price for a new water heater and the average annual energy cost listed on the appliance's yellow Energy Guide label. An Energy Star certified heat pump water heater uses 70 percent less electricity than a conventional electric resistance water heater. Heat pump models cost more to buy, but the annual energy savings — combined with the new IRA rebate (and potentially other incentives) — make a heat pump model much cheaper in the long run. Here's a look at the numbers:

So there you have it. Based on this comparison of comparable water heater models and average energy costs, a heat pump water heater can save you $3,365 over 10 years and $4,940 over 15 years. Most good-quality water heaters last at least 15 years.