Are you considering making your home more energy-efficient and interested in potential tax savings? You may be eligible for two personal tax credits: the energy efficient home improvement credit and the residential clean energy property credit.
The Energy Efficient Home Improvement Credit
The energy efficient home improvement credit is designed to promote and support eco-friendly upgrades to your home. This non-refundable tax credit is available for qualifying property improvements made between January 1, 2023, and January 1, 2033.
The tax credit equals 30% of the total amount spent on specific qualified expenditures up to a $1,200 aggregate limit for a given tax year. Qualifying property improvements include:
- Exterior doors that meet Energy Star requirements (30% of costs up to $250 per door, up to a total of $500)
- Exterior windows and skylights that meet Energy Star requirements (30% of costs up to $600)
- Insulation materials or systems and air sealing materials or systems that meet IECC standards (30% of costs)
- Home energy audits (30% of costs up to $150)
- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces and hot water boilers
- Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders installed along with building envelope components. These must be installed according to National Electric Code and have a load capacity of at least 200 amps.
Some qualifying expenditures are subject to a separate yearly credit limit of $2,000, including:
- Electric or natural gas heat pump water heaters
- Electric or natural gas heat pumps that meet CEE standards
- Biomass stoves and biomass boilers that have a thermal efficiency rating of at least 75%
Keep in mind that it’s possible to combine improvements within the different credit limits, making the maximum yearly energy-efficient home improvement credit you can claim up to $3,200. For example, if you install qualifying windows and a natural gas water heater for a maximum credit of $1,200 and an electric heat pump for a maximum credit of $2,000, you can take advantage of the full $3,200 credit.
This credit cannot be carried forward, so taking advantage of these savings while they are available is important.
The Residential Clean Energy Property Credit
Taxpayers may also benefit from incorporating clean energy sources into their homes. The non-refundable residential clean energy property credit can help reduce your annual tax liability. This 30% tax credit is available for specific qualified expenditures on residential energy-efficient property installed between December 31, 2021, and January 1, 2033.
Eligible residential energy-efficient property includes:
- Solar electric property
- Solar water heating property that’s certified by the Solar Rating Certification Corporation
- Fuel cell property
- Small wind energy property
- Geothermal heat pump property that meets Energy Star requirements
- Battery storage technology that has a capacity of at least 3 kilowatt-hours
The credit percentage rate phases down to 26% for property placed in service in 2033, 22% for property placed in service in 2034, and no credit is available for property placed in service after December 31, 2034. There is no overall dollar limit for the residential clean energy property credit. If you cannot use the entire credit amount in a single tax year, you can carry forward the unused portion of the credit to reduce your tax liability in future tax years.
Qualifications
These credits are designed for your primary residence. While certain improvements made to second homes may qualify, these credits are not available for homes that are not your principal residence. For example, landlords cannot use these credits for improvements to rental properties they do not occupy. However, you can claim a tax credit if you rent a home as your main residence and make eligible improvements.
Using the qualified property for business purposes may still be eligible for the credit but with some restrictions. If your business use of the property is 20% or less, you can claim the full credit. If your business use of the property exceeds 20%, you must calculate the credit amount based on the portion of the expenditure related to non-business use.
Please note that the rules for claiming these credits differ depending on the specific credit. For the energy efficient home improvement credit, you can only claim the credit for qualifying expenses on an existing home or an addition or renovation of an existing home, not for a newly constructed home.
On the other hand, for the residential clean energy property credit, you can claim the credit for qualifying expenses on both existing homes and newly constructed homes. Review the requirements for each credit to determine if your home qualifies.
Maximizing Your Credits
To ensure you get the most from your residential energy tax credits, consider the following tips:
- Keep accurate records. Retain all receipts, invoices, and any other documentation related to your energy-efficient improvements. Additionally, hold onto certifications or other documents that demonstrate the improvements meet the requirements for the credits. This documentation will be crucial when filing your taxes.
- Consult with a qualified professional. Working with an experienced professional can help ensure that your improvements qualify for the credits and that you claim the maximum amount of credits possible.
This article is intended to provide a brief overview of residential energy tax credits and is not a substitute for speaking with one of our expert advisors. If you have questions about these two tax credit opportunities, please contact our office to speak with an advisor.