Thinking about making some upgrades this year that would make your home greener or more energy efficient? Don’t forget to take advantage of the home energy tax credits available from the federal government!
In this guide, we’ll explore what tax credits for home improvements are, what types of upgrades qualify for clean energy, energy efficiency tax credits, and how to take advantage of these credits.
What are home energy tax credits?
The Inflation Reduction Act of 2022 was designed to meet the nation’s climate goals and strengthen energy security. It expanded the types and amounts of tax credits that are available for individuals making energy improvements to their homes.
These tax credits allow you to subtract a certain dollar amount from what you owe the Internal Revenue Service (IRS) when you file your taxes.
The credits are only available for the year when you install the qualifying improvement(s). That means if you’re going to make a qualified upgrade this calendar year, you can claim the available tax credits when you file your taxes early next year.
Tax credits vs. tax deductions
While tax deductions reduce your taxable income, tax credits are generally better — they reduce the actual amount you owe the IRS. If you’re able to claim a home energy tax credit on an improvement you’ve made, it will be applied dollar-for-dollar to your tax debt. This incentive allows more people to afford sustainable home improvements.
What types of home improvement tax credits are available?
Through the Inflation Reduction Act of 2022, there are two main credits available for homeowners: Energy Efficient Home Improvement Credits and Residential Clean Energy Credits. Each has its own set of eligible equipment.
Energy Efficient Home Improvement Tax Credits
According to the IRS, the amount of this credit (through 2032) is, “equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures.” Below are some improvements that may be eligible for the credit, and the maximum amount that can be claimed each year:
Maximum of $1,200 total annually:
- Exterior doors (up to $250 per door, up to $500)
- Exterior windows and skylights (up to $600)
- Insulation/air sealing materials or systems
- Home energy audits (up to $150)
- Central air conditioners, furnaces, and water heaters (up to $600 per item)
Maximum of $2,000 total annually:
- Heat pumps, biomass stoves and biomass boilers
Residential Clean Energy Credits
This 30% credit is related to clean energy-related home improvement, include items like:
- Solar panels
- Solar water heaters
- Fuel cell property costs (up to $500 for each half kilowatt of capacity)
- Small wind energy turbines
- Geothermal heat pumps
- Battery storage technology expenditures
There is no overall annual limit for this credit, except as noted for fuel cell property expenditures.
More rules and eligibility requirements exist for the items listed. Make sure to check the IRS rules and FAQs related to these credits to see if your home improvement is/will be eligible.
How to claim home energy tax credits
To claim Energy Efficient Home Improvement Credits and/or Residential Clean Energy Credits, fill out Form 5695, “Residential Energy Credits,” and file it with your tax return.
(Part I is for clean energy improvements; Part II is for energy efficient home improvements.)
Things to keep in mind about home improvement tax credits
To summarize, here are a few things to remember about the tax credits available through the Inflation Reduction Act of 2022:
- You must claim the credit for the tax year when the improvement is installed (not the year it was purchased).
- The IRS has eligibility requirements for obtaining these tax credits — make sure to read up on current rules and instructions for filing Form 5695.
- Homeowners who improve their primary residence can claim the credits.
- In some cases, renters who make improvements and owners of second homes used as residences can also claim the credits.
- Credits are not available for improvements made to homes not used as residences (for example, properties rented to others).
- The Energy Efficient Home Improvement Credit has an annual limit of $1,200 and no lifetime limit; the Residential Clean Energy Credit has no annual or lifetime limit, except for fuel cell property expenditures (up to $500 for each half kilowatt of capacity).
- For the Residential Clean Energy Credit, the percentage that can be claimed in 2033 drops to 26%; in 2034, it dips further to 22%.
- You should consult a qualified tax professional or financial advisor for personalized advice regarding your specific tax situation and eligibility for tax credits.
Conclusion
Understanding and taking advantage of home energy tax credits can not only lead to significant savings, but also contribute to a healthier planet and more sustainable future.
If you’re thinking about making a qualified home improvement in the near future, remember to stay informed about eligibility, criteria, and documentation requirements so you can maximize your benefits.
*Note: The information provided in this article should not be considered as professional tax advice. The publisher cannot be held liable for any decisions made based on this content. Please consult a qualified tax professional for advice about your specific tax situation and eligibility.