What are the Energy Tax Credits for Homeowners?

The Inflation Reduction Act provides for the extension and expansion of energy tax credits for the upgrading of homes to make them more energy efficient.

Homeowner energy tax credits

With the Inflation Reduction Act being officially law, homeowners can now save money on almost any home improvements they have made to increase their home's energy efficiency.

The bill's key objectives include addressing climate change and reducing global warming while saving money for American taxpayers who claim this tax credit.

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New Incentives for Americans to Go Green

For the 2023 and 2024 tax years, the credit is extended, and the previous regulations are in effect. The energy-efficient home improvement credit will now be worth 30% of the costs of all eligible energy efficient expenses.

The Residential Clean Energy Credit under the Inflation Reduction Act

The present Residential Energy Efficient Property Credit, which also receives a new name under the Inflation Reduction Act, is an energy tax credit that many homeowners can claim on their tax returns.

The new name is the Residential Clean Energy Credit.

The period in which you claim the credit is also extended through 2034 from its original 2024 expiration date.

The Inflation Reduction Act also increases the credit amount in addition to changing the name and lengthening the credit.

Previously, the credit was worth 26% of the cost to install qualifying systems that generate electricity, heat water, or control the temperature in your home using solar, wind, geothermal, biomass, or fuel cells.

Additionally, the credit was supposed to be worth 23% in 2023 before it expired in 2024. The credit amount increases to 30% under the Inflation Reduction Act between 2022 and 2032.

After that, it decreases to 26% in 2033 and 22% in 2034. After 2034, the credit will then become invalid.

What Qualifies for the Residential Clean Energy Tax Credit?

The Residential Energy Efficient Property Credit, also known as the Residential Clean Energy Credit, is a tax credit that the U.S. Federal Government provides to homeowners who install energy-efficient upgrades to their homes.
 
These can include solar electric systems, solar hot water heaters, energy-efficient windows, skylights, doors, geothermal heat pumps, wind turbines, and fuel cells.
 

Here's a closer look at the qualifying systems:

Solar Panels or Photovoltaic Systems: These systems capture sunlight and convert it into electricity for use in the home.

Solar Water Heaters: The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the state where the property is located. At least half of the energy used to heat the dwelling's water must come from solar.

Energy-Efficient Windows, Doors, and Skylights: The windows, doors, and skylights installed must meet or exceed Energy Star program requirements to qualify for the credit. The tax credit is worth 30% of the cost of the windows, doors, or skylights.

Geothermal Heat Pumps: These systems use the constant temperature of the earth to heat and cool homes. The system must meet the requirements of the ENERGY STAR program that are in effect at the time the equipment is installed.

Wind Turbines: Small wind turbines can also qualify if they generate electricity for residential use. The turbines must have a nameplate capacity of up to 100 kilowatts to qualify.

Fuel Cell Systems: These must be installed in connection with the taxpayer's main home, and they must have a minimum capacity of one-half kilowatt of electricity using an electrochemical process and an electricity-only generation efficiency of greater than 30%.

Remember to keep detailed records of all associated costs of these energy-efficient improvements, as they could potentially be counted towards the credit.

The tax credit is calculated as a percentage of the costs, including installation, and there's no upper limit on the amount of the credit for solar, wind, and geothermal equipment.

Solar Panel Tax Credit Extended

The Federal ITC Solar Panel Investment Tax Credit was supposed to decrease from 26% in 2022 to 22% in 2023 under previous legislation.

According to the new law, homeowners will be allowed to claim a credit equal to 30% of the price of a residential solar installation until 2032.

Anyone who installed residential solar in 2022 before the bill's passage is eligible to retroactively claim the 30% credit under a clause in the legislation.

The 30% credit can also be used by homeowners for energy storage, according to the measure. This includes battery storage systems put in after a solar panel installation for a house.

This new bill offers much-needed relief to many who have been impatiently awaiting the arrival of batteries, fearing that the credit might expire before they could be installed.

Windows, Doors, and Skylights Tax Credit

This is a tax credit for making certain energy-efficiency improvements to homes, such as installing energy-efficient exterior windows, doors, and skylights.

As long as the upgrades meet Energy Star standards, you will qualify to claim the energy tax credit. This credit is worth 30% of the cost and a maximum of,

  • $250 for an exterior door ($500 total for all exterior doors)
  • $600 for exterior windows and skylights

When claiming the credit, homeowners need to fill out IRS Form 5695, "Residential Energy Credits," and include it with their tax return.

Homeowners should also keep a copy of the Manufacturer's Certification Statement and any receipts for their records.

What are ENERGY STAR Tax Credits?

  • Central air conditioning – The criteria for a $300 tax credit are met by air conditioners that have earned the ENERGY STAR Most Efficient designation.
  • Certified heat pumps – Certified heat pumps are eligible for $300.
  • Gas, propane, or oil boilers – Most Efficient gas boilers satisfy the standards for this $150 tax credit, which also covers installation expenses.
  • Natural gas, propane, or oil furnace – Gas furnaces that are ENERGY STAR certified (apart from those that are just for the South of the United States) satisfy the criteria for the $150 furnace tax credit. Fans that satisfy the criteria for the $150 fan tax credit are included in gas and oil furnaces.
  • Advanced main air circulating fans – To be eligible for $50, this fan must use no more than 2% of the total energy used by your furnace.
  • Water heaters (non-solar) – The majority of water heaters qualify for $300. (i.e. those with an energy factor of 2.2 or more). The $300 credit is also available for water heaters using gas, oil, or propane that have a thermal efficiency of at least 90% and an energy factor of 0.82 or higher.
  • Windows, Doors, and Skylights – You are qualified for 30% of the cost (excluding installation) of any windows, doors, or skylights you replaced or installed if they have earned the ENERGY STAR, up to a maximum of $500 for doors and $600 for windows and skylights. If you added a window or door when there wasn’t one before, you can also claim the credit.
  • Roofs (Metal and Asphalt) – A credit of 30% of the cost, up to $500, is available for roofing materials that meet the requirements and have the proper pigmented coatings and cooling granules. This credit does not cover installation costs.
  • Insulation – Standard bulk insulation items such batts, rolls, blown-in fibers, rigid boards, spray foam, and pour-in-place can be eligible for up to $600 in cost-savings, or 30% of the cost, excluding installation fees. You can still receive credit if you decide to install the insulation/home sealing goods yourself.
  • Products that air seal  - Products that  reduce air leaks can also qualify, as long as they come with a Manufacturer’s Certification Statement, including:
     
    • Weatherstripping
    • Spray foam in a can, designed to air seal
    • Caulk designed to air seal
    • House wrap

Energy Star Roofing Materials

Energy Star is a program run by the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE).

The goal of Energy Star is to help consumers, businesses, and industries save money and protect the environment through energy-efficient products and practices.

When it comes to roofing materials, Energy Star-qualified roof products reflect more of the sun's rays, which can lower roof surface temperature by up to 50 degrees Fahrenheit.

This could result in less heat transfer into a building, reducing the amount of air conditioning needed in hot weather, leading to energy conservation and savings on cooling costs.

Energy Star-Certified Roofing Shingles and Roof Tiles

Energy Star-certified roofing materials include certain types of roof shingles and roof tiles that have been specially designed to be highly reflective, even in dark colors.

Traditional dark-colored roofing materials absorb more heat, but Energy Star-certified options have a more reflective surface, reducing heat absorption.

These products are available in various types, including asphalt shingles, metal roofs, and tile roofing.

The type of roofing material that is best for a particular home depends on various factors, including the climate, the design of the home, and local building code requirements.

Energy Star Asphalt and Metal Roofs

Tax credits specifically for asphalt and metal roofing will typically fall under the umbrella of the federal energy efficiency tax credits if the roofing materials are Energy Star certified and designed to improve the energy efficiency of the home.

If your roof meets Energy Star standards, your roof will reflect more of the sun and reduce surface temperatures by up to 100 F.

Metal roofs with pigmented coatings and asphalt roofs with cooling granules will qualify for this. You can claim back 30% of the cost up to a maximum of $500.

Energy Star Qualifications

To be qualified as Energy Star, these roofing materials must meet specific standards for solar reflectance or their ability to reflect sunlight and heat away from a building.

These standards are based on the results of third-party testing and verification.

By choosing Energy Star-qualified roofing products, homeowners can reduce their home's cooling costs, improve the comfort of their home (especially during hot summer months), and may qualify for a federal tax credit.

This aligns with the government's initiative to promote energy efficiency and environmentally friendly practices in homes.

Remember, when purchasing new roofing materials, look for the Energy Star label to ensure they meet the standards for energy efficiency.

Non-Solar Water Heaters

The U.S. federal government has offered tax credits for energy-efficient non-solar water heaters as a part of its initiative to promote energy conservation.

Here's a brief outline of the key features:

  1. Qualifying Improvements: To qualify, the non-solar water heater must meet specific energy-efficiency requirements. For gas, oil, and propane water heaters, the equipment must have a thermal efficiency of at least 90%. For electric heat pump water heaters, they must have an energy factor of at least 2.0.

  2. Credit Amount: The credit covers up to 30% of the cost, up to $600, for a qualifying water heater. Please note the credit doesn't include the cost of installation.

  3. Principal Residence: The water heater must be installed in your primary residence. Rentals and second homes do not qualify.

  4. Filing Process: To claim the credit, homeowners need to fill out IRS Form 5695, "Residential Energy Credits," and submit it with their tax return.

Home Insulation

The U.S. federal government offers a tax credit for homeowners who make certain energy-efficient upgrades to their homes, which includes adding insulation.

  1. Qualifying Improvements: The insulation installed must meet or exceed the 2018 International Energy Conservation Code (IECC) and amendments. It can include bulk insulation products like batts, rolls, blow-in fibers, rigid boards, spray foam, and pour-in-place, or products that reduce air leaks like weather stripping, spray foam in a can, caulk, and house wrap.

  2. Credit Amount: The tax credit is worth 30% of the cost of the insulation, up to a maximum of $1200 for all improvements combined. The cost does not include installation, only the cost of materials.

  3. Filing Process: To claim the credit, you'll need to fill out IRS Form 5695, "Residential Energy Credits," and submit it with your tax return.

  4. Documentation: It's recommended to keep a copy of the Manufacturer's Certification Statement for your records, along with any receipts or invoices for the purchase and installation of the insulation.

Home insulation products qualify for a tax credit if they meet Energy Star standards.

In addition, anything that reduces air loss, weather stripping, or caulk can also qualify if you possess a certification statement from the manufacturer.

Biomass Stoves

The U.S. federal government offers a tax credit for homeowners who install biomass stoves as a way to incentivize renewable energy use and energy efficiency.

Biomass stoves are stoves that burn plant-derived fuels known as biomass (which includes wood, wood waste and residues, plants, grasses, and fibers).

Here's a brief description of the biomass stove tax credit:

  1. Qualifying Improvements: To qualify, the stove must have a thermal efficiency rating of at least 75% and burn biomass fuel to heat a dwelling or to heat water for use in the dwelling. The stove must be used in the taxpayer's primary residence in the U.S.

  2. Credit Amount: The credit is equal to 30% of the stove's cost, including installation. There's no upper limit on the amount of the credit for biomass stoves.

  3. Filing Process: Homeowners can claim the credit by filling out IRS Form 5695, "Residential Energy Credits," and submitting it with their tax return.

  4. Documentation: It's recommended to keep the sales receipt and Manufacturer's Certification Statement for your records, along with any documentation regarding the stove's thermal efficiency rating.

  5. Expiration: The credit is set to expire at the end of 2032.

HVAC, AC, Heating, and Ventilation

Certain products used for AC, ventilation, and heating will also qualify for a tax credit.

  • HVAC Systems: This includes certain high-efficiency central air conditioning systems and heat pumps.

  • Heating Systems: Some high-efficiency natural gas, propane, or oil furnaces and boilers are eligible.

For AC’s, it's worth $300, heat pumps are worth $300, and boilers using gas, propane, or oil are worth $150.

In addition, any furnaces using natural gas, oil, or propane can yield a $150 credit.

Geothermal Heat Pump

The Geothermal Heat Pump tax credit is a federal tax credit available in the United States to incentivize the adoption of geothermal heat pump systems.

The Geothermal Heat Pump tax credit allows homeowners to claim a tax credit for a percentage of the qualified expenses related to the installation of a geothermal heat pump system in their primary residence or a second home.

The credit covers both the equipment and installation costs.

The key details of the Geothermal Heat Pump tax credit are as follows:

  1. Credit Amount: The credit is equal to 30% of the total qualified expenses, including the cost of the geothermal heat pump system and its installation.

  2. Eligible Systems: To qualify, the geothermal heat pump system needs to meet certain energy efficiency requirements and be installed in a residence owned and used by the taxpayer. The system has to be certified by the Energy Star program.

  3. Expiration: The tax credit was initially set to expire at the end of 2021 but has been extended to 2032.

The credit is available for geothermal technology that utilizes the underground storage of solar energy for heating and cooling.

Wind Turbines

A residential wind turbine is another highly efficient upgrade. But, again, like with geothermal pumps, you can claim back 30% of the total cost, there’s no upper dollar limit, and you can claim it on second homes.

Both newly built homes and existing ones are eligible. Second homes and primary residences are also acceptable. Rentals are not acceptable.

The taxpayer's primary residence must have this system installed in connection with it. The residence must be located in the United States. It is not necessary for the taxpayer's primary abode to be the residence served by this system.

The house where you spend most of your time is your principal residence. The house must be located in the US. A prefabricated home, cooperative apartment, cooperative house, houseboat, and mobile home are all examples of this.​

Is There a Lifetime Limit on the Credits?

No. There is no lifetime limit for either credit; the limits for the credits are determined on a yearly basis.

For example, beginning in 2023, a taxpayer can claim the maximum Energy Efficient Home Improvement Credit allowed every year that eligible improvements are made.

The Future of Green Energy

Under the Inflation Reduction Act, the credit amount jumps to 30% from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034.

The credit will then expire after 2034. So, it would be best to keep all certificates, statements, and receipts.

How Can I Claim My Energy Tax Credits?

When you file your taxes online, you can be ensured that you will be able to claim the energy tax credit.

The tax filing software can recommend the best choices and show you which deductions and credits you qualify for.

They also do the math and fill in all the correct tax forms so you don't have to.

FAQs

Is there a limit on the amount of credit I can claim?

Yes, there are credit limits for each eligible improvement. For example, the residential energy property credit is typically capped at a specific dollar amount, which can vary based on the type of upgrade.

Are energy tax credits refundable?

Some energy tax credits are refundable, while others are nonrefundable. Refundable credits can result in a refund even if you don't owe any taxes, while nonrefundable credits can only offset your tax liability.

Are these tax credits available every year?

Yes, energy tax credits have been extended until 2032. The Residential Clean Energy Credit, is a tax credit that the U.S. Federal Government provides to homeowners who install energy-efficient upgrades to their homes.

Do state-level energy incentives align with federal credits?

State-level energy incentives can differ from federal credits. Some states offer their own tax incentives or rebates for energy-efficient upgrades.

Can I claim energy tax credits for rental properties?

Energy tax credits for residential energy improvements are generally not available for rental properties. However, commercial property owners may have separate incentives.

Do these tax credits apply to new homes?

Energy tax credits are primarily targeted at existing homes. However, newly constructed homes qualify for tax credits as long as they meet the Energy Star standard.

Are installation costs included in the credits?

In most cases, installation costs are not included in the credit amount. However, certain installation expenses related to renewable energy systems, like solar panels, may be eligible.

Can I claim energy tax credits for multiple upgrades?

Yes, homeowners can claim energy tax credits for multiple qualifying upgrades within a tax year. However, credit limits apply to each specific improvement.

Do I need to keep documentation of my energy-efficient upgrades?

Yes, it's crucial to retain all relevant receipts, product information, and documentation of your energy-efficient upgrades. These documents will be necessary if you were to be audited.

Can I claim energy tax credits for a second home?

Yes, homeowners can often claim energy tax credits for qualifying energy-efficient upgrades made to a second home, as long as the upgrades meet the eligibility criteria.

How do I know if a product qualifies for the credit?

Look for the Energy Star label on products, as it indicates they meet the necessary efficiency standards. Additionally, consult the manufacturer's documentation for specific eligibility information.

Can I claim energy tax credits for DIY projects?

Energy tax credits generally apply to the cost of purchasing eligible products. DIY projects without qualifying products may not be eligible.

Can I amend past tax returns to claim energy tax credits?

Yes, if you missed claiming energy tax credits in previous years, you can typically amend your tax returns for up to three years to claim those credits.