Making energy-efficient home improvements, such as upgrading to Energy Star-certified windows and doors, and installing clean energy equipment, such as solar panels and water heaters, can save taxpayers big on their tax bill each year over the next decade under new IRS rules.
Beginning Jan. 1, 2023, taxpayers can qualify for a tax credit of up to $3,200 for making qualified energy-efficient home improvements – this credit equals 30 percent of certain qualified expenses including qualified energy efficiency improvements installed during the year, residential energy property expenses, and home energy audits.
The maximum credit you can claim each year is:
“Under revamped tax credits, homeowners can get up to $1,200 for insulation and other items, and up to $2,000 for a heat pump, calculated at 30 percent of the costs. A tax credit lowers your tax bill dollar for dollar,” explained the Wall Street Journal. “It is an annual credit, meaning you could take it one year for putting in new windows, and another year for adding insulation. You can claim improvements made in 2023 on IRS Form 5695 when you file taxes next year. You can’t get back more than you owe in taxes, and you can’t carry forward any excess to future tax years.”
In addition, the Residential Clean Energy Property Credit of 30 percent for the cost of installing solar panels, solar water heaters, fuel cells, wind turbines, and other qualifying equipment has no overall dollar limit – though the fuel cell property expenditures credit is 30 percent up to maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.
The Energy Home Improvement Credit can be claimed for improvement to your main home (considered by the IRS where you generally live most of the time).
For the energy efficiency home improvement credit, the home must be:
In most cases, the home 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 your home partly for business, the credit for eligible clean energy expenses is as follows:
Building Envelope Components
To qualify, building envelope components must have an expected lifespan of at least 5 years. Qualified components include new:
Labor costs for installing building envelope components don't qualify for the credit.
Home Energy Audit
A home energy audit for your main home may qualify for a tax credit of up to $150.
To qualify in 2023 (there will be new rules in 2024), the home energy audit must:
Residential Energy Property
Residential energy property that meets the Consortium for Energy Efficiency (CEE) highest efficiency tier, not including any advanced tier, in effect at the beginning of the year when the property is installed qualifies for a credit of up to $600 per item. Costs may include labor for installation.
Qualified property includes new:
Oil furnaces or hot water boilers can also qualify through other efficiency criteria.
Costs of electrical components needed to support residential energy property, including panelboards, sub-panelboards, branch circuits, and feeders, also qualify for the credit if they meet the National Electric Code and have a capacity of 200 amps or more. There is a limit of $600 per item.
Heat Pumps, Biomass Stoves, and Boilers
Heat pumps and biomass stoves and boilers with a thermal efficiency rating of at least 75% qualify for a credit of up to $2,000 per year. Costs may include labor for installation.
Qualified improvements include new:
Subsidies, Rebates, and Incentives
When calculating your credit, you may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses because they're considered a purchase price adjustment:
o The rebate is based on the cost of the property.
o It comes from someone connected to the sale such as the manufacturer, distributor, seller, or installer.
o It isn't given as payment for services you provide.
The following residential clean energy expenditures are eligible for a Residential Clean Energy Property Credit of 30 percent of the cost:
In general, traditional roofing materials and structural components do not qualify for the Residential Clean Energy Property Credit because they primarily serve a roofing or structural function. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items qualify for the credit.
There is no overall dollar limit for the Residential Clean Energy Property Credit. The credit is generally limited to 30 percent of qualified expenditures made for property placed in service beginning in 2022 through 2032.
However, the credit allowed for fuel cell property expenditures is 30 percent of the expenditures up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.
In the case of a residence or dwelling unit that is jointly occupied by two or more individuals, the maximum amount of such fuel cell property expenditures used to calculate the total Residential Clean Energy Property Credit amount for all individuals living in that dwelling unit during a calendar year is limited to $1,667 for each half kilowatt of capacity of qualified fuel cell property.
As always taxpayers are encouraged to keep good records of purchases and expenses during the time the improvements are made. This will assist in claiming the applicable credit during tax filing season.