Energy efficient home improvements and residential clean energy property tax credits
Energy efficient home improvement and other tax credits have changed over time, and often needed Congress to extend such credits and required taxpayers to maintain permanent records. The credits tend to be specific as to what qualifies and not overly generous in amount. But, some credit is better than no credit! Following is a summary of certain credits that are most likely to have wide applicability.
What homeowners need to know about the energy efficient home improvement credit
The energy efficient home improvement credit is likely the most relevant credit to homeowners. Following are qualifications for homeowner’s to claim the credit:
- Through December 31, 2022 – a $500 lifetime credit
- Tax Years 2023 through 2032 – The Inflation Reduction Act of 2022 (IRA 2022) removed the lifetime limitation and increased the credit to an annual amount of (generally) $1,200, but you can claim an additional annual limit of $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers for a total credit of $3,200.
- Credit based on 30% of the total paid for (1) qualified energy efficiency improvements installed during the year, (2) residential energy property expenditures during the year, and (3) home energy audits during the year.
What improvements are eligible for the energy efficient home improvement credit?
Keep in mind that labor costs are generally included when determining qualified costs; however, labor costs are not included for energy efficient building envelope components including a qualifying insulation material or system, exterior window, skylight, or exterior door.
- Building envelope components satisfying the energy efficiency requirements under the Energy Efficiency Requirements section:
- Exterior doors (30% of costs up to $250 per door, up to a total of $500)
- Exterior windows and skylights (30% of costs up to $600), and
- Insulation materials or systems and air sealing materials or systems (30% of costs).
- Home energy audits (30% of costs up to $150)
- The audit must include an inspection of a dwelling, including condominiums and certain manufactured homes, located in the United States that is owned or used by the taxpayer as the taxpayer’s principal residence. The home energy auditor must provide a written report.
- Residential energy property (30% of costs, including labor, up to $600 for each item) satisfying the energy efficiency requirements under the Energy Efficiency Requirements section:
- Central air conditioners; Natural gas, propane, or oil water heaters;
- Natural gas, propane, or oil furnaces and hot water boilers; and
- Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property listed in these FAQs and enable its installation and use.
- Heat pumps and biomass stoves and biomass boilers (30% of costs, including labor) satisfying the energy efficiency requirements under the Energy Efficiency Requirements section:
- Electric or natural gas heat pump water heaters;
- Electric or natural gas heat pumps; and
- Biomass stoves and biomass boilers.
What homeowners need to know about the residential clean energy property credit
Homeowners should be aware that labor costs are generally included when calculating the residential clean energy property credit, including onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.
- Tax years 2022 through 2032: 30% credit for certain qualified expenditures
- IRA 2022 included modifications to the applicable credit percentage rates, and added battery storage technology as an eligible expenditure.
- Tax Year 2033: 26% credit for certain qualified expenditures
- Tax Year 2034: 22% credit for certain qualified expenditures
- Tax Credit 2035 and forward: No credit
What expenditures qualify for the residential clean energy property credit?
- Solar electric property expenditures (solar panels);
- Note: Traditional roofing materials and structural components do not qualify for the residential clean energy property credit because they primarily serve a roofing or structural function. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items do qualify for the credit.
- Solar water heating property expenditures (solar water heaters);
- Fuel cell property expenditures;
- The credit allowed for fuel cell property expenditures is 30% of the expenditures up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property. This credit can be increased to $1,667 for each half kilowatt of capacity if two or more individuals are living in the home.
- Small wind energy property expenditures (wind turbines);
- Geothermal heat pump property expenditures; and
- Battery storage technology expenditures.
There is generally no limit on the amount of the residential clean energy property credits, just the percentage applicable.
Does your home qualify for a tax credit?
Credits may be available for certain improvements made to second homes, but the credits are never available if the improvements are made to homes not used as a residence by the taxpayer. For example, landlords can never use these credits for improvements made to any homes they rent out but do not use as a residence themselves. However, if a taxpayer is renting a home as their principal residence and makes eligible improvements, a tax credit may be available to such tenant.
Note: The credit varies by the improvement made to the home.
Energy efficient home improvement credit examples
- Exterior doors, windows and skylights, insulation materials or systems, and air sealing materials or systems: the home must be located in the United States and must be owned and used by the taxpayer as the taxpayer’s principal residence
- Central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; and improvements to panelboards, sub-panelboards, branch circuits, or feeders: the home must be located in the United States and used as a residence by the taxpayer (includes renters); and
- Home energy audits: the home must be located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence (includes renters).
Residential clean energy property credit examples
- Solar water heating property expenditures, solar electric property expenditure, small wind energy property expenditures, geothermal heat pump property expenditures, and battery storage technology expenditures: the home must be located in the United States and used as a residence by the taxpayer (includes renters); and
- Fuel cell property expenditures: the home must be located in the United States and used as a principal residence by the taxpayer (includes renters).
Additional homeowner tax credit requirements
- The credit is claimed in the year when the property is installed.
- There is no tax credit carryforward for the energy efficient home improvement credit nor is the credit refundable.
- There is a carryforward for the residential clean energy property credit.
- All qualifying property must be new, not used.
- If the taxpayer receives a subsidy/ credit/ rebate for the installation of qualifying property, the cost used to calculate the credit is generally reduced by the amount of such subsidy/ credit/ rebate.
The Internal Revenue Service (IRS) has started to issue guidance via Frequently Asked Questions (FAQs). The FAQs are updated periodically to clarify certain points and examples are often provided.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.