How Home Improvements Can Qualify You for Home Energy Credits

The Internal Revenue Service is reminding taxpayers that implementing energy-efficient upgrades in their homes may make them eligible for valuable home energy credits.

These credits, which were broadened under the Inflation Reduction Act of 2022, encompass various types of qualifying expenses associated with energy improvements.

Essential Information for Taxpayers

Taxpayers are eligible to claim the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit in the tax year when they incur qualifying expenses.

Homeowners who enhance their primary residence have the greatest chance to qualify for tax credits based on eligible expenses. Renters and owners of second homes used as residences may also potentially claim these credits. However, landlords are not eligible to claim this particular tax credit.

The IRS advises taxpayers to visit IRS.gov/homeenergy to thoroughly review the requirements and qualifications for energy-efficient equipment before making purchases. For further details, energy.gov offers additional information, including comparisons of credit amounts between tax year 2022 and tax years 2023 to 2032.

Energy Efficient Home Improvement Credit

Taxpayers who make eligible energy-efficient improvements to their homes on or after January 1, 2023, may be eligible to receive a tax credit of up to $3,200.

Under the provisions of the Inflation Reduction Act effective from January 1, 2023, taxpayers may claim a credit equivalent to 30% of specific qualified expenses. 

1. Energy efficiency improvements eligible for tax credits that can be installed during the year include:

• Exterior doors, windows and skylights.
• Insulation and air sealing materials or systems.

2. Expenses related to residential energy property, eligible for tax credits, include:

• Natural gas, propane or oil water heaters.
• Natural gas, propane or oil furnaces and hot water boilers.

3. Heat pumps, water heaters, biomass stoves and boilers.
4. Home energy audits of a main home.

The maximum credit that taxpayers can claim each year is:

• Taxpayers can claim up to $1,200 annually for expenses related to energy property and specific energy-efficient home improvements. This includes limits such as $250 per door (up to $500 total), $600 for windows, and up to $150 for home energy audits.
• Taxpayers may claim up to $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers.

The credit is nonrefundable, meaning taxpayers cannot receive more from the credit than their tax liability for the year. Any excess credit cannot be carried forward to offset taxes in future years.

Residential Clean Energy Credit

Taxpayers who make investments in energy improvements for their primary residence, such as solar panels, wind turbines, geothermal heat pumps, fuel cells, or battery storage systems, may be eligible to receive an annual residential clean energy tax credit.

The Residential Clean Energy Credit allows taxpayers to claim 30% of the costs associated with installing new, eligible clean energy property in their U.S. home. This credit is available for installations completed between 2022 and 2032.

Qualified expenses encompass the costs associated with installing new, clean energy equipment, which may include:

• Solar electric panels.
• Solar water heaters.
• Wind turbines.
• Geothermal heat pumps.
• Fuel cells.
• Battery storage technology

To qualify for the Residential Clean Energy Credit, clean energy equipment must meet specific standards, which include:

• Solar water heaters must be certified by the Solar Rating Certification Corporation, or a comparable entity endorsed by the applicable state.
• Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
• Battery storage technology must have a capacity of at least 3 kilowatt hours.

There is no annual or lifetime dollar limit for this credit, except for fuel cell property. Taxpayers can claim the credit each year they install qualifying property between January 1, 2023, and January 1, 2033.

This credit is nonrefundable, meaning the amount received cannot exceed the taxpayer’s tax liability. Any excess unused credit can be carried forward and applied to offset tax owed in future years.

For more details on qualifying residences and guidance for taxpayers who use their homes for business purposes, additional information is accessible on IRS.gov.

When preparing their tax returns, taxpayers should use Form 5695, Residential Energy Credits, to claim the credit for eligible energy improvements. It’s important to note that the credit must be claimed in the tax year when the property is installed, not merely when it is purchased.

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