Tax Breaks for Energy Improvements to Your Home in 2023

The Inflation Reduction Act, which was passed in the summer of 2022, made favorable changes related to energy improvements to your home. The following applies to “energy improvement” property placed in service after December 31, 2022; you won’t reap a tax benefit until you file your 2023 federal income tax return in 2024. Caution: The following do not necessarily apply to improvements made to your home in 2022 (see the instructions to Form 5695 for details about claiming credits on 2022 returns).

The credits are meant for personal residences…a main home and/or a vacation property used as a residence (not rented out). Renters, not landlords, however, may also qualify. If your use of a residence for business purposes is not more than 20%, you may claim the full credit. For example, if you are self-employed and claim a home office deduction for 10% of the square footage of the home, you may claim the full credit as a personal credit. If, however, business use exceeds 20%, you must calculate the amount of credit by including only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes.

The credits are nonrefundable. If you don’t have enough tax liability to offset the energy efficient home improvement credit, you lose the unused amount. But for the residential clean energy credit, an unused amount may be carried forward to reduce tax liability in future years.

Energy efficient home improvement credit

As a homeowner, you may qualify for a tax credit of 30% of qualified expenditures, up to an overall maximum credit of $1,200 per year, plus an additional limit of $2,000 for heat pumps and biomass stoves and boilers. The amount of the credit is not limited by any home-energy credit taken in prior years. The following categories of qualified expenditures are subject to separate limitations in addition to the overall $1,200 per year credit cap:

• Qualified energy efficiency improvements (including envelope components) installed during the year
• Home energy audits during the year
• Residential energy property expenditures during the year

Building envelope components. These are exterior doors (30% of costs up to $250 per door, up to a total of $500); exterior windows and skylights (30% of costs up to $600); and insulation materials or systems and air sealing materials or systems (30% of costs) that meet energy efficiency requirements.

Home energy audits. The credit amount is 30% of costs up to $150.

Residential energy property. This is 30% of costs, including labor, up to $600 for each of the following items that meet certain energy standards:

• 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 that are installed along with building envelope components or other energy property

Heat pumps and biomass stoves and biomass boilers. Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers have a separate aggregate yearly credit limit for the cost of property plus labor of 30% of the cost of property plus labor, up to $2,000. Thus, the maximum total yearly energy efficient home improvement credit amount may be up to $3,200 ($1,200 explained above plus $2,000).

Energy standards. Different energy standards apply to different property. Generally, an Energy Star certification designates that the standards have been met.

Residential clean energy property credit

You may claim a credit of 30% of qualified costs for buying and installing certain property for renewable energy (e.g., solar panels). There is no dollar limit. The 30% credit runs through 2032, and then phases down to 26% in 2033, and 22% in 2034; no credit may be claimed for property placed in service after 2034 unless Congress extends this tax break.

Property eligible for the credit includes:

• Solar electric property expenditures (solar panels)
• Solar water heating property expenditures (solar water heaters)
• Fuel cell property expenditures
• Small wind energy property expenditures (wind turbines)
• Geothermal heat pump property expenditures
• Battery storage technology expenditures

Traditional roofing materials and structural components do not qualify for the credit because they primarily serve a roofing or structural function. However, some solar roofing tiles and solar roofing shingles that serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support, may qualify for the credit.

Alternative fuel refueling property credit

If you install a charging station to power an electric vehicle (EV) in your residence after December 31, 2022, and before January 1, 2033, you may be able to claim a credit of 30% of the cost, up to $1,000. The credit also covers bidirectional charging equipment. However, you must be in a low-income community or non-urban area to be eligible for the credit.

Conclusion

The receipt of a subsidy—an incentive, grant, or rebate—to install qualifying property may impact eligibility to claim the credit or trigger taxable income. For example, state energy-efficiency incentives may be taxable income even though labeled as “rebates. But actual rebates from a manufacturer merely reduce the purchase price of the property on which the credit is figured. If you are making any energy improvements to your home, ask questions of the dealer, contractor, etc. so you can determine whether and to what extent you may be eligible for a federal tax credit.

Sources: IR-2022-225

Resources: Frequently asked questions about energy efficient home improvements and residential clean energy property credits (irs.gov)