Tax Credits for Energy-Efficient Home Improvements

Thinking about making home improvements that will increase your home’s energy efficiency?

Under the Inflation Reduction Act of 2022, tax credits are available for improvements that make homes more energy efficient, help homeowners switch to use clean energy sources, and retrofit heating and cooling systems.

The Details:

New Doors, Windows, Skylights, Insulation and Heat Pumps

The energy-efficient home improvement credit has been raised to $1,200 from the $500 lifetime credit for the installation of new doors, windows, skylights, insulation, and heat pumps. This credit can’t exceed 30% of the qualified expenditures, including home energy audits, building envelope components, and insulation or air sealing materials. Exterior doors, windows and skylights must meet Energy Star requirements. There is a limitation specifically for doors, windows, and skylights of $250 per door, window, or skylight, which caps out at $500 per year.

Home energy audits

The audit must include an inspection of your dwelling that is used as your primary residence, including condominiums. The maximum of this credit is $150, and the credit can’t exceed 30% of the audit cost.

Insulation or air sealing materials and systems

The credit covers 30% of these costs. These materials and systems must meet the International Energy Conservation Code standard criteria.

Residential Clean Energy Property Credit

The Residential Clean Energy Property Credit, which is available until 2034, is a credit that can’t exceed 30% of the expenditure, and includes amounts spent on battery storage technology.

To qualify for the credit, the following equipment must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency at the beginning of the year in which the property is put into service:

• Central air conditioners
• Natural gas, propane or oil water heaters
• Natural gas, propane or oil furnaces and hot water boilers
• Biomass stoves and boilers with a thermal efficiency rating of 75% or more
• Improvements or replacements of panelboards, sub-panelboards, branch circuits or feeders installed with building envelope components

Although the maximum aggregate tax credit limit for all energy-efficient home improvements, including building envelope components, energy property and home energy audits, is $1,200 per year, electric or natural gas heat pump water heaters, heat pumps and biomass stoves or boilers have a separate maximum yearly credit limit of $2,000. This means that the maximum yearly energy-efficient home improvement credit available is $3,200.

The Residential Clean Energy Property Credit allows for a 30% credit on the cost of eligible expenditures, including the following:

• Solar electric property, which includes solar roofing tiles and shingles as well as solar panels that serve as solar energy collectors
• Solar water heaters
• Fuel cell property expenditures
• Small wind energy expenditures like turbines
• Geothermal heat pump property expenditures
• Battery storage technology expenditures, which allow for a credit of 30% of expenditures up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property

Landlords cannot use credits for any homes rented out that are not used by the landlord. In cases where a dwelling is jointly occupied, the maximum credit is $1,667 for each half kilowatt of capacity of qualified fuel cell property. Improvements made to second homes must meet certain criteria. The credit is available for property placed in service between 2022 and 2034. The credits cannot be claimed until the year the improvement is installed. Building envelope components must be expected to remain in use for at least five years.

The Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are nonrefundable personal tax credits. Taxpayers can only use these nonrefundable credits to decrease or eliminate tax liability. If the credits exceed the tax liability for the year, the excess credit will not be refunded, but can be carried forward to the next year. Taxpayers subject to the alternative minimum tax (AMT) are also eligible to claim these credits, and the credits can be used to offset the AMT.

If you have any specific questions regarding these credits, please reach out to your LMC professional.