The Internal Revenue Service is encouraging taxpayers to consider the incentives being offered by investing in energy-efficient products and services. By making certain energy efficient improvements to one’s residence, it could aid with qualifying for home energy tax credits which not only assist with the cost of energy-saving improvements but also can lower your cost of living. The Inflation Reduction Act of 2022 modified the two existing individual income tax credits for energy-related residential improvements by increasing the credit amounts and expanding the list of qualifying expenses. Homeowners who choose to improve their primary residence will have the largest advantage in claiming a credit for qualifying expenses. In some circumstances, renters and owners of second homes used as residences may also be able to claim a credit. However, landlords do not qualify. It is strongly advised to keep detailed records of any purchases and expenditures during the time the improvements are made to a residence as this will greatly assist in proper claiming of credit during the applicable tax year filing.
Energy Efficient Home Improvement Credit (previously known as the Non-Business Energy Property Credit)
Taxpayers that make qualified energy efficient improvements to their main home (where you generally live most of the time) after January 1, 2023, may qualify for a tax credit up to $3,200 with no lifetime dollar amount, for the tax year the improvements are made. The energy efficient home improvement credit equals 30% of certain qualified expenses, such as:
Residential energy property expenses:
- Heat pumps, water heaters, central air conditioners.
- Oil furnaces and hot water boilers.
- Biomass stoves and boilers (with a thermal efficiency rating of at least 75%)
- Natural gas, propane or oil water heaters.
Qualified energy efficiency improvements installed during the year which can include:
- Exterior doors, windows and skylights.
- Insulation and air sealing materials or systems.
The maximum credit that can be claimed is $1,200 annually for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door/$500 total), windows ($600) and home energy audits ($150). Additionally, $2,000 can be claimed each year for heat pumps, biomass stoves or biomass boilers.
The credit is only available for qualifying expenditures to an existing home or for an addition or renovation of an existing home; therefore, new homes and property used solely for business purposes do not qualify for the tax credit. The credit is non-refundable which means taxpayers cannot get back more from the credit than what is owed in taxes and any excess credit cannot be carried to future tax years. You can claim the maximum annual credit every year that you make eligible improvements through end of year 2032.
Residential Clean Energy Credit
The Residential Clean Energy Credit is a renewable energy credit that equals 30% of the total qualified clean energy property installed in a home within the United States during year 2022 through year 2032. Please note, taxpayers are able to claim this credit each tax year they install eligible property until the credit begins to phase out in year 2033. This credit will decline to 26% for property placed in service in 2033 and drop to 22% for property placed in service in 2034. No credit is available after December 31, 2034.
Unlike the energy efficient home improvement credit, taxpayers can qualify for the residential clean energy property credit for qualifying expenditures incurred for installing new clean energy property in an existing home or for a newly constructed home. Taxpayers who invest in energy improvements for their main home, including solar, wind, geothermal, fuel cells or battery storage, may qualify for an annual residential clean energy tax credit. Additionally, taxpayers may be able to claim a credit for certain improvements, other than fuel cell property expenditures made to a second home that they live in part-time and don’t rent to others.
Qualified expenses include the costs of new, clean energy equipment including, such as:
- Solar electric panels.
- Solar water heaters.
- Small residential wind turbines.
- Geothermal heat pumps.
- Residential fuel cells.
- Battery storage technology.
Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:
- Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
- Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
- Battery storage technology property must have a capacity of at least 3 kilowatt-hours or greater.
This credit has no annual or lifetime dollar limit except for fuel cell property (based on their capacity). This is a non-refundable credit, which means the credit amount received cannot exceed the amount owed in tax; however, taxpayers can carry forward excess unused credit and apply it to any tax owed in future years.
When claiming a credit for either the Energy Efficient Home Improvement Credit or Residential Clean Energy Credit, taxpayers will need to complete Form 5695, Residential Energy Credits, to include with their tax return filing. It’s important to note that this credit must be claimed for the tax year when the property is installed, not just purchased.
Additional information and FAQs can be found on the IRS.gov website regarding qualifying residences as well as for taxpayers who also use their home for business purposes. If you have any questions, please consult with your tax advisor for further guidance on the various energy incentives to help determine eligibility and ensure compliance when claiming a credit on a tax return.