Tax Credits for Energy Efficient Home Improvements

With summer underway, you may be considering some home projects and updates. As you are selecting your next household projects, you may want to consider how your updates can save energy and maximize tax benefits.

The Inflation Reduction Act of 2023 (IRA) amended the existing credits for energy efficient home improvements. Beginning in January 2023 through 2032, home improvements qualifying for the Energy Efficient Home Improvements credit can claim credits up to $3,200. The credits are nonrefundable so if the tax is reduced to zero, the remainder of the credit is forfeited. The Energy Efficient Home Improvement Credit is only available on residential homes in the United States.

What is the Energy Efficient Home Improvement Credit?

Until January 2023, the Energy efficient home improvement credit had a lifetime limit of $500. The IRA increased the amount for qualifying property placed in service after January 1, 2023, and before January 1, 2033 from $500 to an annual credit of $1,200 and removed the lifetime limit. Heat pumps and biomass stoves and boilers have an aggregate yearly credit of $2,000. Qualified expenses under the Energy Efficient Home Improvement Credit include building components, audits, residential energy property, and heat pumps and biomass stoves and biomass boilers.

What are the Specific Requirements for Qualified Expenses?

Exterior doors must meet current Energy Star Requirements. For Current Energy Star Certified products, visit energystar.gov. The limit for exterior doors is 30% of the costs up to $250 per door and a total of $500. Exterior windows and skylights must also meet Energy Star certification requirements and are limited to 30% of the cost up to $600. Insulation materials must meet the International Energy Conservation Code in place two years before installation. There is no specific credit limit but is included in the $1,200 maximum credit limit. Labor costs of all building components are excluded.

Home energy audits qualify for a credit of 30% of cost up to $150.  The energy audits must be completed by a certified auditor and include an inspection of the home owned or used by the taxpayer as primary residence and the taxpayer must receive a written report. The written report should include energy efficient improvements and the potential cost savings for such improvements. Auditor certification requirements are unavailable at the time of writing.

Residential energy property includes central air conditioners; natural gas, propane, or oil water heaters; and natural gas, propane, or oil furnaces and hot water boilers. These items must meet or exceed the highest efficiency tier according to the Consortium for Energy Efficiency for the year placed in service. See https://cee1.org/ for qualified items. The credit available for residential energy property is 30% of costs, including labor, up to $600 per item.

Heat pumps and biomass stoves and biomass boilers include electric or natural gas heat pump water heaters; electric or natural gas heat pumps; and biomass stoves and biomass boilers. Heat pumps must meet the highest efficiency tier according to the Consortium for Energy Efficiency in the year placed in service. Biomass stoves or boilers must have thermal efficiency ratings of at least 75%. The annual credit limit for these items is an aggregate of $2,000.

How can I use this information for tax planning?

Making energy efficient improvements is always a good idea for energy savings, cost savings, and helping the environment. Adding tax credits is a bonus. When planning home improvement projects, keep these few items in mind from a tax perspective:

• The Energy Efficient Home Improvement Credit is nonrefundable, if your total credits will reduce your tax to zero, you will lose some or all of the credit.
• Any lost credits cannot be carried forward.
• With the passage of the Inflation Reduction Act, a lifetime limit is no longer a constraint, you may take advantage of the credit each year.
• Be sure to always check that items meet the current standards and energy efficient requirements as these products do change.
• Be sure to maintain records of all purchases to avoid losing the credit in the event of an audit.

Sources

Inflation Reduction Act https://www.congress.gov/bill/117th-congress/house-bill/5376

IRS Fact Sheet about energy efficient home improvements and Residential clean energy property credits: https://www.irs.gov/pub/taxpros/fs-2022-40.pdf