In this article, we explore what an energy efficient home improvement credit is, explain what the qualifications are, and answer some of the most frequently asked questions. We also discuss what other options are available to you when looking to remodel your home.
What Is an Energy Efficient Home Improvement Credit?
An energy efficient home improvement credit is a financial incentive that the Internal Revenue Service (IRS) provides to encourage homeowners to make improvements around their homes that will conserve energy. With a primary goal to address climate change, the Inflation Reduction Act of 2022 significantly extended tax credits for home improvements through both the energy-efficient home improvement credit, (previously known as the non-business energy property credit) and the residential clean energy credit, (previously known as the residential energy-efficient property credit), so that they last longer with a greater financial impact for homeowners.
If you make qualifying energy-efficient improvements to your home between 2023 and 2032, you can claim tax credits through one of these programs, so it’s important to understand the eligibility requirements and limitations, as well as the process for claiming credits.
Do You Qualify for an Energy Efficient Home Improvement Credit?
Each of the two programs have slightly different parameters for qualifying properties.
Energy Efficient Home Improvement Credit
The energy efficient home improvement credit is for existing primary residences in the United States. A primary residence is defined as the home you live in most of the year. Rental properties, second homes, and new homes do not qualify for this credit, and those used for business are eligible for a credit based on the share of improvement expenses allocated for non-business use. For example, if you use a spare bedroom in your home as a full-time home office, any energy efficient home improvements in that room would not qualify for the credit; however, improvements made throughout the rest of your home would qualify.
Residential Clean Energy Property Credit
The residential clean energy property credit is for new or existing primary residences in the United States, whether you own or rent. Certain improvements are available for second homes that are occupied part-time, and just like the energy efficient home improvement credit, those used for business are eligible for a credit based on the share of improvement expenses allocated to non-business use. The credit is not available for landlords or other property owners that do not reside in the property.
How To Calculate Your Energy Efficient Home Improvement Credit
Each program has a list of qualified improvements and credit maximums. See if the improvements you want to make to your home qualify for either program.
Energy Efficient Home Improvement Credit
With the Energy Efficient Home Improvement Credit, you may receive 30% of your total improvement expenses, up to a maximum of $3,200, for the following improvements:
- Up to $1,200 for new insulation and air-sealing materials; excluding labor costs.
- $250 per exterior door up to $500 total and $600 total for new windows; excluding labor costs.
- Up to $600 per item for central air conditioners, water heaters, furnaces, and hot water boilers that meet the Consortium for Energy Efficiency’s highest efficiency tier (not including any advanced tier); labor costs for installation can be included in the total improvement cost.
- Up to $2,000 per item for electric or natural gas heat pumps, heat pump water heaters, biomass stoves, and boilers with a thermal efficiency rating of at least 75%; labor costs for installation can be included in the total improvement cost.
- Up to $150 for a Home Energy Audit, which is an inspection and analysis performed by a certified home energy auditor that identifies areas for energy-efficient improvements and explains how you can reduce your energy usage and monthly costs.
The credit is nonrefundable, meaning you can’t receive more in credit than you owe in taxes, and you can’t apply any excess credit to future tax years. You can claim the credit every year that you make qualified improvements.
Residential Clean Energy Property Credit
With the Residential Clean Energy Property Credit, you may receive 30% of the cost of the following clean energy improvements installed between 2022 and 2032. In 2033 and 2034 the credit reduces to 26% and 22% respectively. The credit has no annual or lifetime limit with the exception of the below noted limits for fuel cell improvements.
- New and unused solar electrical panels and water heaters, wind turbines, geothermal heat pumps, and battery storage technology; labor for on site preparation, assembly, installation, and piping or wiring to connect to the home can be included in the total improvement costs.
- Solar roof tiles and shingles qualify for credit, however, traditional building materials that serve as roofing or functional support do not qualify.
- Up to $500 for each half-kilowatt of fuel cell capacity. If more than one person lives in the home, the combined credit for all residents cannot exceed $1,667 for each half-kilowatt of capacity.
The credit is also nonrefundable, so you can’t receive more credit than you owe in taxes, but you can apply any excess credit to future tax years and claim the credit every year that you make qualified improvements.
Alternative Solutions for Financing Home Improvement Projects
In addition to these federal tax credit programs there a number of tax breaks available at the state and local level that can offset home improvements costs. These tax breaks can take the form of credits, deductions, or exemptions and vary by the type of project and property location. To find available programs in your area, check with your state’s department of revenue and your local tax assessor’s office. You can also find information on available programs by searching online.
If your project is small, such as replacing exterior doors, you can use a credit card or apply for a personal loan. Many credit card companies offering zero percent interest on larger purchase for a set number of months allow you to spread the expense over time. This is also the case with a personal loan, but you will have interest — and it will typically be higher than other financing options. Both of these options also have shorter repayment periods, which will impact your monthly payments. Check out our personal loan calculator for a better idea of what these payments may look like.
Traditional home finance options, such as a cash-out refinance which allows you to refinance your home and take the extra cash to cover the cost of improvements, are available through banks, credit unions, and mortgage banks and brokers. But with interest rates at 20 year highs, it might not make sense for you trade in your low interest rate mortgage for a larger one at a higher interest rate.
RenoFI Loans are another alternative solution — one that offers the lowest rates and most favorable terms. RenoFi has exclusive partnerships with credit unions to help you find the best rate to fund your project. These loans also use the after-renovation value of your home to calculate borrowing power, which is especially important if you don’t have a lot of equity built up in your home. It can help increase the amount you can borrow significantly to cover all the upgrades on your wish list. You also get to keep your existing mortgage intact and can pay off the loan early if you prefer, without the risk of prepayment penalties. Contact a RenoFi Advisorto learn more about how we can help.
Whether you choose to pursue one of the government programs or explore an alternative solution for making energy efficiency improvements in your home, you’ll benefit in the long term by reducing your energy consumption and lowering monthly energy costs.
Frequently Asked Questions
What are some of the available tax credits for energy-efficient home improvements?
The two primary tax credits for energy-efficient home improvements are the energy-efficient home improvement credit and the residential clean energy property credit. The qualifications, limitations, and claims process are outlined above.
How can I claim these tax credits?
You can claim credits in any tax year you make qualified improvements by completing and filing IRS Form 5695 with your tax returns.
What are some of the energy efficient upgrades that qualify for tax credits?
Each program has different eligible improvements.
For the Energy-Efficient Home Improvement Credit, upgrades include:
- Exterior doors, windows, skylights, and insulation materials
- Central air conditioners, water heaters, furnaces, boilers, and heat pumps
- Biomass stoves and boilers
- Home energy audits
For the Residential Clean Energy Property Credit, upgrades include:
- Solar electrical panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage technology
What is the Inflation Reduction Act, and how does it affect tax credits for energy-efficient home improvements?
With a primary goal to address climate change, the Inflation Reduction Act of 2022 significantly expanded and extended tax credits for energy efficient home improvements. These include the Energy Efficient Home Improvement Credit, previously known as the Nonbusiness Energy Property Credit, and the Residential Clean Energy credit, previously known as the Residential Energy Efficient Property Credit.
How can I save with these new climate tax breaks?
These tax incentives offset the upfront cost of qualified energy efficient upgrades, making them more affordable. These upgrades will help to reduce your monthly energy usage and costs.
Other Sources:
https://www.constellation.com/energy-101/homeowners-guide-tax-credits-and-rebates.html
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