Energy-Efficient Home Improvements and Tax Credits

Going green with your home improvements could have you stacking greenbacks. Up to $3200 in tax credits could be sitting in your home, just waiting to be claimed on your next return.

If you made energy-efficient improvements to your home after January 1, 2023, it’s completely possible. Two tax credits—one for renewable energy and one for energy-efficient home improvements are available through 2034. Plus, you can claim the maximum annual credit every year you’ve made improvements, thanks to the revamp of the Inflation Reduction Act.

Taxpayers can receive 30% of the money spent on qualifying updates and improvements as a tax credit, while also enjoying lower energy bills and reducing their carbon footprint and environmental impact. (Suddenly, investing in those energy-efficient windows seems like a good plan!)

Let’s walk through the home-improvement tax credit program details, along with what kind of home-improvement projects qualify:

The two programs (the Residential Clean Energy Credit and the Energy-Efficient Home Improvement Credit) are similar. They both:

• Offer a 30% tax credit on qualifying expenses

• Are available annually through 2032

• Require IRS Form 5695

• Can be claimed at the same time

Where they differ, however, is with the stipulations, such as the annual limit to the credit and the kinds of items that qualify.

Tax Credit Program #1: Residential Clean Energy Credit

WHAT IT IS:

The first page of IRS Form 5695 details the Residential Clean Energy Credit program. It provides tax credits for purchasing qualifying equipment, like wind, solar, geothermal, and fuel-cell technology.

QUICK BREAKDOWN:

• Amount in Tax Credits: 30%

• Limit on Tax Credits (Annual): None

• Limit on Tax Credits: (Lifetime): None

• Qualifying Item Category: Clean Energy (power generation and banking/storage)

• Qualifying Homes: Primary Residences (and some qualifying secondary residences)

• Credit Carryover?: Yes, an excess can be used for future tax years

WHAT COUNTS TOWARD THE RESIDENTIAL CLEAN ENERGY TAX CREDIT?

You can receive 30% of the purchase price back in tax credits when you purchase equipment for:

• Solar electricity

• Fuel cells

• Wind turbines; and

• Battery storage

Save your paperwork, and ask your CPA or tax advisor for help collecting the information needed for IRS Form 5695.

WHO CAN CLAIM THIS HOME TAX CREDIT?

If the equipment is added to the primary residence of a homeowner or renter, the tax credit may be claimed—if the homeowners do not live in the home (if it’s a rental home), they can’t claim this tax credit. Additionally, this credit can be claimed by owners of a second home (like a vacation home) that they do not rent out for additional income—and reside in some of the time. If the home is used for business more than 20% of the time, there are added guidelines. Be sure to check the IRS FAQ and fact sheet, and ask your tax professional for additional help.

RELATED: Funding Options For Your Home Improvement Project

Tax Credit Program #2: Energy-Efficient Home Improvement Credit

WHAT IT IS

The remaining two pages of IRS Form 5695 detail the Energy-Efficient Home Improvement Credit. This tax credit program was created to incentivize homeowners considering energy-efficient improvements, energy audits, and qualifying equipment for their property. It can help homeowners recoup (through tax credits) some of the costs associated with upgrading to energy-efficient windows, improving their air conditioning systems, or even adding skylights or insulation to their home—plus plenty more, as you’ll see below.

QUICK BREAKDOWN:

• Amount in Tax Credits: 30%

• Limit on Tax Credits (Annual): $3200

• Limit on Tax Credits: (Lifetime): None

• Qualifying Item Category: Energy-efficient home upgrades (windows, HVAC, boilers)

• Qualifying Homes: Primary Residences only

• Credit Carryover?: No, credit can’t be applied to future tax years

WHAT COUNTS TOWARD THE ENERGY-EFFICIENT TAX CREDIT?

This energy-efficient tax credit counts only if the homeowner has upgraded their existing primary residence—not a brand new home. We’ll break it down here by the amount you can receive back in tax credits:

Receive 30% back in tax credits, up to $2000 per year, when you install:*

• Heat pumps

• Heat pump water heaters

• Biomass stoves

*Good to know: The cost of installation and the product counts toward the credit.

Receive 30% back in tax credits, up to $1000 per year, when you install:

• A home charger for an electric vehicle

Receive 30% back in tax credits, up to $600 per item, when you install:

• Energy-efficient air conditioners

• Energy-efficient heating equipment

• Energy-efficient water heating equipment

• An electrical panel or upgrade your circuit for new electric equipment

• Windows—including skylights**

**Good to know: Windows and skylights have a $600 total limit.

Receive 30% back in tax credits, up to $500, when you install:

• Exterior doors (up to $250 each)

Receive 30% back in tax credits, up to $150 per year, when you complete a:

• Home energy audit (for which you’ll need a written inspection report)

Some items listed above have an additional annual cap; please check the IRS website and Energy.gov to learn more.

WHO CAN CLAIM THIS HOME TAX CREDIT?

If you are making these updates to your existing primary residence, you may qualify, including renovations or additions to an existing home. Newly constructed homes are not eligible for these credits. Second homes and homes used for business more than 20% of the time are not eligible, either. To ensure you’re making eligible changes, check the IRS’ online fact sheets and FAQ page before you begin the updates and upgrades.

How Do Energy Tax Credits Work?

Generally speaking, energy tax credits work in much the same way as typical tax credits—they reduce the amount of tax an individual owes. However, they won’t lead to a higher refund if you don’t owe any taxes; they just lower the amount you may owe.

For energy tax credits, you’ll need to submit a specific tax form, IRS Form 5695, for both of the tax credit programs listed here. In the simplest terms, the amount of credit you may take for these programs is a percentage of the total improvement expenses you incur in the year it’s installed.

RELATED: First-Time Home Buyer’s Guide to Tax Credits and Deductions

Bonus Points: How Do I Get Tax Credits For My Electric Car?

We are well into the future, with solar panels, wind-generated power, and electric cars becoming a regular sight on the road. For every electric car, there must be a “fuel” source, even if it’s not diesel or gasoline. Electric fuel-cell equipment is part of the Residential Clean Energy Credit program. So, while you may be able to get tax credits for the purchase of an electric car, that’s a completely different program.

Fuel-cell equipment installed in your primary residence can qualify for the credit. However, according to the IRS, there are credit limits ($500 for each half-kilowatt of capacity) for fuel-cell property. If there’s more than one resident, the limit goes up, but it can’t exceed $1667 for each half-kW of fuel cell capacity. The battery storage must also have a 3kw hour capacity to qualify.

Tax credits can be complicated, but you can use them to make homeownership a little more affordable when you update and upgrade your appliances.

To learn more about homeownership or tax credits and deductions specifically for homeowners, get in touch with our team at PacRes. We’re always happy to help.