Today we will talk about wood stove tax credits. Tax credit is constantly evolving and changing. There is a new revised tax credit and we want to make sure that everyone has all the most important up-to-date information so you can make an informed decision when buying a wood or pellet stove.
At the end of 2020, a new spending legislation and pandemic relief package was signed into law. This new tax credit which runs from January 2021 through the end of December 2023 applies to consumers buying high efficiency residential heating or hot water system equipment that burns biomass wood pellets chips or cord wood as the fuel. You will be able to claim a 26% tax credit that has no cap or lifetime limit. This applies to primary and secondary residences which means you can buy for more than one property and claim the credit for each property based on the full cost of purchase and installation of the unit. The credit will remain at 26% through year 2021 and next year 2022, and then step down at 22% in 2023.
To claim this credit, the qualifying wood burning furnace, pellet stove, home heating, or hot water system that meets the efficiency and biomass standards must be purchased and installed between January 1st 2021 and December 31st 2023. Specifically speaking, it must burn biomass fuel such as wood pellets, wood chips or cord wood. It must run at 75% efficiency heating value or higher and meet EPA standards. The tax credit is applied towards the total purchase and installation costs of your new or upgraded home heating system on your tax form.
This tax credit, however, had a new revised version that will start in January 2023. High-efficiency biomass heating products once again qualify for a tax credit under Section 25(C) of the Internal Revenue Code (IRC) under the Inflation Reduction Act (IRA) signed on August 16, 2022. Beginning in 2023, consumers buying highly efficient wood or pellet stoves or larger residential biomass heating systems may be eligible to claim a 30% tax credit that is capped at $2,000 annually and is based on the full cost (purchase and installation) of the unit. The credit runs through December 31, 2032. This new 30 percent tax credit is available for appliances installed between January 1, 2023, and December 31, 2032. To be eligible for the tax credit, an appliance must have a thermal efficiency of at least 75% per the higher heating value (HHV) of the fuel.
To further understand this, let us go through some important key points as well as the similarities and differences of the old and latest version of this wood stove tax credits.
1. Firstly, what is the Inflation Reduction Act (IRA)?
The Inflation Reduction Act is the most aggressive action in tackling the climate crisis in U.S. history. This law helps minimize harmful air pollution, promote environmental justice, and lower energy costs for families. Through President Biden's Inflation Reduction Act (IRA), the U.S. Environmental Protection Agency (EPA) has received an historic amount of funding to leverage expertise and existing programs, as well as to set up and execute new programs. These initiatives, carried out by the EPA's Office of Air and Radiation including even funding for air quality and climate projects addressing clean energy, transportation, methane emissions, and climate super-pollutants, will advance the President's ambitious agenda to combat the climate crisis, safeguard public health, and advance environmental justice.
2. Secondly, let us discuss what HHV is.
HHV stands for the higher heating value and it's basically a form of measurement. It indicates the upper limit of the available thermal energy produced by a complete combustion of fuel. It is measured as a unit of energy per unit mass or volume of substance. The HHV is determined by bringing all the products of combustion back to the original pre-combustion temperature in a particular condensing any vapor produced. Such measurements often use a standard temperature of 25 degrees Celsius or 77 degrees Fahrenheit.
3. What are the similarities?
The similarities of the current tax credit that will run through the rest of year 2022 and the new revised one that will start in January 2023 are:
a. Technically, what’s the same is what qualifies. Wood units, freestanding inserts, built in the wall fireplaces, and pellet units that use biomass fuel are those that qualify.
b. Next, an appliance must have a thermal efficiency of at least 75% per the higher heating value (HHV) of the fuel. This is another requirement for the product to qualify.
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4. What are the differences?
The difference of the old and latest version of this tax credit are:
SummaryHere are the major points to sum it all up:
- Effective Dates:
The new tax credit under Sec. 25(C) of the U.S. Internal Revenue Code (IRC) is effect on January 1, 2023 for qualifying purchases and installations completed on or after that date, through December 31, 2032.
- Credit Amount:
Creates a new tax credit of 30% of the purchase and installation costs (with a $2,000 annual cap with no lifetime limit) for tax years 2023 through 2032.
- Qualifying Products:
- IRC Sec. 25(D) of the tax code where appliances were eligible for an uncapped 26 percent tax credit in 2021 and 2022 will be eliminated starting 2023.
- Any product purchased in 2022 that qualifies for the new Sec. 25(C) credit, but isn't installed until 2023, can be claimed under the Sec. 25(C) credit on a 2023 tax return. Products must be claimed on tax returns for the year in which they are fully installed.