Home Energy Credits: A Guide

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Remember the last time you opened your heating bill and felt defeated? Or when you turned your air conditioning on max during summer, cursing the mounting costs?

Across the board, we face increasing energy prices while trying to control our personal climate at a cost to our pocketbooks and the planet. This is where Home Energy Credits come into play.

A mix of federal, state, and utility-company initiatives, these credits help you lower your power costs and incentivize making your home more energy-efficient.

The long-run implications are good for both the household budget and the environment.

Understanding and leveraging these credits could save you thousands of dollars _annually _and even more over the long term.

Let’s dive in!

What is a Home Energy Credit?

Home Energy Credits are incentives governments and utility companies provide to encourage homeowners to make energy-efficient improvements to their homes, such as insulation, window replacements, and solar panel installations.

They are generally reflected in a discount or "credit" applied to your energy bill, making these essential improvements more affordable and saving you long-term money.

Types of Home Energy Credits

There are several types of Home Energy Credits on offer:

  • Federal tax credits: These extend to installations like geothermal heat pumps, small wind turbines, and solar energy systems.
  • State incentives: Managed on the state level, these credits differ across geographical locations and might tap into specific local environmental considerations.
  • Utility rebates: Your energy provider may outline details about available utility company rebates on energy-saving appliances or improvements made to your home.

Before transitioning to energy-efficient appliances, it is advisable to study all the available credits specific to your region and the nature of the improvements you aim to make.

You may be eligible for tax credits for energy-saving home improvements. The Inflation Reduction Act of 2022 increased the amount and types of qualifying expenses. We can help you assess the credits and determine if they apply to already-paid expenses or future improvements.

Who can Claim Home Energy Credits?

Homeowners of their primary residence may claim a credit for qualifying energy efficiency improvements. Renters and owners of second homes used as residences can also benefit from the credits. No credits are applied for improvements made to non-residential homes.

However, a frequently asked question is: What properties are eligible for the credits? Can the credits be applied to a second home or one the taxpayer rents?

The answer is that tax credits are only available for eligible improvements to a taxpayer's second home. They are not available for improvements made to a rental property. However, qualifying improvements to a home a taxpayer rents as their principal residence may be eligible for a credit.

To qualify for the Energy Efficient Home Improvement Credit, the following must be met:

  1. The taxpayer must own and use a home in the U.S. as their principal residence to qualify for exterior door, window, skylight, insulation, and air sealing materials/systems.
  2. Central air conditioners, water heaters (natural gas, propane, or oil), furnaces or hot water boilers (natural gas, propane, or oil), electric or natural gas heat pumps, electric or natural gas heat pump water heaters, biomass stoves or boilers, and panelboards, sub-panelboards, branch circuits, or feeder improvements are eligible for tax incentives if the home is located in the United States and is used as a principal residence by the taxpayer (includes renters). Home energy audits are also eligible if the home is located in the United States and is owned or used by the taxpayer as the taxpayer's principal residence (including renters).

You must meet certain criteria to qualify for the Residential Clean Energy Property Credit.

  1. To qualify for property expenditure deductions on solar water heating, solar electricity, small wind energy, geothermal heat pump, and battery storage technologies, the property must be located in the U.S. and used as a residence by the taxpayer (including renters).
  2. U.S. taxpayers and renters may claim fuel cell property expenditures if their home is their principal residence.

Another question is can taxpayers claim credits for expenditures on an existing or newly built home?

The answer is that it depends on the credit.

  • Taxpayers can claim the Energy Efficient Home Improvement Credit for expenses related to an existing home or an addition or renovation of an existing home, but not for a newly constructed home.
  • Taxpayers can claim the Residential Clean Energy Property Credit for qualifying expenditures on existing and newly constructed homes.

Lastly, can a taxpayer claim a credit if an item of qualified property is used for personal and business purposes?

The answer is that the taxpayers may only claim the full credit if they use the property solely for business purposes and their use does not exceed 20%.

If usage exceeds 20%, the credit must be calculated based on the portion of expenditures allocated to nonbusiness purposes.

What is the Energy Efficient Home Improvement Credit?

After Jan. 1, 2023, you may qualify for a tax credit of up to $3,200 for making qualified energy-efficient improvements to your home. This credit is available until 2032.

For improvements installed by 2022 or before, the IRS recommends using the previous versions of Form 5695.

From Jan. 1, 2023, you can receive a 30% credit against qualified expenses, such as energy efficiency improvements, residential energy property, and energy audits.

Credit is limited annually and by type of expense for qualified property placed in service from Jan. 1, 2023, through Jan. 1, 2033.

The maximum credit you can claim each year is:

  • You can claim up to $1,200 for energy-related property costs and energy-efficient home improvements.
  • Doors are limited to $250 per door and $500 total; windows are limited to $600, and home energy audits to $150.
  • Qualified heat pumps, biomass stoves, and biomass boilers can be funded up to $2,000 annually.

You are able to claim a maximum annual credit for eligible improvements every year until 2033, with no dollar limit. The credit cannot be refunded if the amount of credit you've received is greater than your tax liability. The remaining credit cannot be applied to future taxes.

Who qualifies?

For the energy-efficient home improvement credit, your main home must meet the following criteria:

  • located in the United States,
  • an existing home that is being improved or added to (not a new home), and
  • in most cases, must be your primary residence (where you live most of the year).

You can't claim the credit if you are a landlord or other property owner who doesn't live in the home.

If you use the property for business use:

  • If you use a property exclusively for business, you will not be eligible for the energy credit.
  • If you use your home for business and non-business purposes, the credit will be based on the portion of energy expenses attributed to non-business use. A maximum of 20% of the total expenses can be claimed for business use.

What are the qualified expenses and credit amounts?

Home improvements must meet energy efficiency standards in order to qualify. These must be new systems and materials, not used. Some improvements have specific credit limits too, as detailed below.

  1. Qualified building envelope components must have an expected lifespan of at least 5 years.
  2. Eligible exterior doors, windows, skylights and insulation/air sealing materials/systems must meet applicable Energy Star or IECC standards, respectively. The credit limit for exterior doors is $250/door and $500 total; the skylights limit is $600; the other items have a max credit of $1,200. Standards must be those in effect two years prior to installation, e.g., materials/systems installed in 2025 must meet IECC standards in effect Jan. 1, 2023.

Installation labor costs are not eligible for the credit on building envelope components.

What are the requirements for home energy audits?

You may be eligible for a tax credit of up to $150 for a home energy audit of your primary residence. To qualify, the audit must include a written report and inspection that identifies the most cost-efficient improvements to the home, including calculated energy and cost savings. The audit must be conducted and written by a certified home energy auditor.

By 2024, the following must be fulfilled:

  • Home energy audits must be conducted by or supervised by a qualified home energy auditor certified by one of the programs listed on the U.S. Dept. of Energy's Section 25C credit programs for energy-efficient home improvement.
  • A qualified home energy auditor must prepare and sign a written report that follows industry best practices and includes:
  • The home energy auditor must provide their name and taxpayer identifying number (EIN or other applicable type) if an EIN is unavailable.
  • The qualified home energy auditor must be certified by an accredited certification program and the name of such qualified certification program.

What is the Residential Clean Energy Credit?

Homeowners who install clean energy systems, such as solar, wind, geothermal, fuel cells, or battery storage technology, may qualify for the Residential Clean Energy Credit - an annual tax incentive.

Here’s how it works:

The Residential Clean Energy Credit is worth up to 30% of the costs of clean energy property (installed from 2022 to 2032) for your home. The credit rate decreases to 26% for property placed in service in 2033 and 22% for 2034. You may be eligible for the credit if you made energy-saving improvements to your US-based home.

The nonrefundable credit amount you receive cannot exceed the amount of tax you owe. Any remaining unused credit can be applied towards reducing future taxes owed. Interest payments and loan origination fees are excluded.

You can use the credit each year you install eligible property until the phase-out period begins in 2033. There is no annual or lifetime dollar limit, with the exception of credit limits for fuel cell property.

  • The maximum credit for fuel cell property is $500 per half kilowatt of capacity. When multiple residents live in the same home, the total credit cannot exceed $1,667 per half kilowatt.

Who qualifies:

The residential clean energy credit applies to new or existing homes in the United States, whether you own or rent them, as long as they are your main residence (where you live most of the time). Property owners who don't live in the home cannot claim the credit. You may claim the credit for certain improvements made to a second home located in the United States that you live in part-time and don't rent to others, excluding fuel cell property. Learn more about qualifying residences.

If you use the property for business use:

  • If you use a property solely for business purposes, you are not eligible to claim the credit. If you use your home partly for business, your business-to-business use ratio determines the maximum available credit.
  • You can claim full credit for up to 20% business use. For greater than 20% business use, you can claim a credit based on expenses allocable to nonbusiness use.

What are qualified expenses?

Qualified expenses include new clean energy property costs, such as solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage from 2023.

Used, previously owned property is not eligible.

Qualified expenses may cover labor costs for onsite preparation, assembly, original installation, and piping/wiring to connect it to the home.

Traditional building components used primarily for roofing or structural purposes, such as roof trusses and traditional shingles, don't qualify. However, solar roofing tiles and shingles qualify as they generate clean energy.

What about subsidies, rebates and incentives?

Subtract any subsidies, rebates, or other financial incentives from your qualified property expenses when calculating your credit - these are viewed as purchase-price adjustments.

  • Subsidies received for purchasing or installing clean energy property are deductible from related expenses, regardless if the subsidy is sent to you or your contractor. Payments for clean energy you sell back to the grid, like net metering credits, do not affect the amount of expenses eligible for deduction.
  • Rebates are deducted from qualified expenses when all the following are applicable: the rebate is linked to the cost of the property, it is received from the seller, manufacturer, distributor, or installer, and it is not given in exchange for services rendered.
  • Incentives for energy efficiency are usually not taken from eligible costs unless they meet the definition of rebate or cost-reduction under federal income tax regulation. However, many states classify these incentives as rebates, even though they don't fit the criteria. These incentives must be reported as income on federal income tax returns.

What about qualified clean energy property?

To qualify for the residential clean energy credit, clean energy property must meet certain standards.

  • Solar water heaters must be certified by the Solar Rating Certification Corporation or an approved comparable entity.
  • Geothermal heat pumps must meet Energy Star requirements.
  • Battery storage technology must have a minimum capacity of 3 kilowatt hours.

And lastly, to claim the Residential Energy Credit, submit Form 5695 with your tax return. This credit must be claimed in the year that the property is installed, not purchased.

Tips to Make the Most of the Residential Clean Energy Credit

  • Start by researching the most efficient and suitable clean energy technology for your home, factoring in your home's environmental conditions, energy needs, and local power rates.
  • Collaborate with a reliable clean energy provider who can provide accurate assessments and high-quality installation.
  • Keep a thorough record of all costs related to your clean energy property — purchase, installation, and maintenance.
  • Remember to subtract the amount from the qualified expenditure when calculating your tax credit if you receive a rebate or another incentive for your clean energy property.
  • Watch out for transmission or provision charge changes after installing your clean energy property; these can impact your savings.
  • Familiarize yourself with federal, state, and local tax regulations related to clean energy property so you can optimize your energy savings and tax benefits.
  • Always consult a professional tax advisor or accountant to ensure you're correctly claiming all eligible expenses and credits associated with residential clean energy investments.
  • Be strategic about when you make your investments in clean energy technology. The phase-out period begins in 2033, so plan your investments accordingly to maximize credits.
  • Even properties you use part-time can qualify for the credit. Remember that rental properties or properties not used as your main residence do not qualify for this credit.

To Recap

There you go—all you needed to know about the home energy tax credit. Maximizing the benefits of this credit requires proper research, strategic planning, and an understanding of your energy needs and the related tax requirements.

It can contribute to significant savings and help you play your part in reducing your carbon footprint and making your home more energy efficient.

However, consulting with a reputable tax advisor before making any investments or claims relating to residential clean energy technologies is recommended.

FAQs

Who is eligible for home energy tax credits?

All homeowners who have installed qualified energy efficiency improvements in their primary residences within the U.S are generally eligible for the home energy tax credits. However, credit is disallowed for any amount allocable to a portion of the property used for non-qualifying purposes, such as businesses conducted from home.

Does leasing solar panels qualify for the tax credit?

As the lessee, you generally can't claim a tax credit for solar panels since you don't own them. The lessor (usually a solar company) retains the ownership of the system and is normally the one entitled to the tax credit.

How can I find local incentives for clean energy installation?

Local incentives can be found out from your state's energy office or the Department of Energy’s Database of State Incentives for Renewables & Efficiency (DSIRE). Moreover, engaging with a professional clean energy provider can help uncover hidden local incentives, rebates or grants.

What if I am not able to utilize the entire tax credit in the taxation year?

Unused portions of the Residential Energy Credit may be carried over to the following year's tax return – but remember, this applies exclusively to credits for spending done within that taxation year. Please consult with your tax advisor for more details.

Can I claim this credit if I install clean energy equipment in a new construction home?

Yes, even homes under construction with energy-efficient equipment installed can qualify for the credit. However, the credit can only be claimed for the taxation year when the construction is fully completed and the home is in use.

Are joint owners of clean energy property both eligible for the tax credit?

The tax credit for joint owners applies according to each party's percentage of ownership. Each co-owner must claim the credit proportionately based on their ownership stake and must individually complete and submit Form 5695 with their tax returns.

What if I move houses after installing the clean energy equipment?

If you installed a clean energy system in your home and then moved before using up all your tax credits from that expenditure, you can't transfer this leftover credit to your new residence. It is tied to the house where you made the installation.

Is there a cap on the residential energy tax credit amounts?

Think of the residential energy credit as uncapped for solar and wind installations – you're eligible for a credit worth 26% or 22% of the total qualifying costs with no limits. However, other energy-efficient technologies may have maximum credit amounts.