Making your home more energy efficient may become less expensive thanks to two valuable income tax credits for energy-efficient home improvements that were extended and expanded in the “Inflation Reduction Act of 2022.” Beginning in 2023, Homeowners can now obtain increased tax credits for Energy Efficient Home Improvement Credits. Increased Residential Clean Energy Credits were made available beginning in late 2022.
Extension and Modification of Energy Efficient Home Improvement Credit
For 2023-2032, the Act increases the Energy Efficient Home Improvement Credit from 10% of qualifying expenditures to 30% up to $1,200 per year. There is no longer a lifetime limit of $500. Formerly called the nonbusiness energy property credit, the new energy efficient home improvement credit can be claimed for a longer list of qualifying expenditures.
The federal tax credit can be claimed for qualified energy efficiency improvement and energy property expenditures for your U.S. principal residence. There is also a $150 credit available for a home energy audit for the taxpayer’s U.S. principal residence.
While the overall credit is limited to $1,200 per year, there are annual credit limits of (1) $600 for residential energy property expenditures such as windows, and skylights; and (2) $250 for any one exterior door and a total of $500 for all exterior doors. Notwithstanding the annual credit limits, a special $2,000 annual credit limit applies to qualified expenditures for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
There are “Product ID Requirements” that will take effect after 2024. For specified property items placed in service after 2024, no credit will be allowed unless (1) the item is produced by a qualified manufacturer, as defined by the Act; and (2) the taxpayer includes the qualified product identification number of the item on the taxpayer’s Form 1040.
Extension and Modification of Residential Clean Energy Credit
The more lucrative federal income tax credit for eligible energy-saving home improvements is now called the residential clean energy credit. It was formerly called the residential energy efficient property credit. Qualifying expenditures for these higher credits generally include costs for generating alternative sources of energy for your home. Since eligible gear is usually pretty expensive, allowable credits can be pretty big. There also are no income limits. Even billionaires are eligible! The credit can be used to reduce your regular federal income tax bill and the alternative minimum tax if you owe it.
For installations in 2020-2021, the credit equaled 26% of qualified expenditures for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel equipment. The Inflation Reduction Act increased the credit percentage to 30% for 2022-2032 installations. The credit percentage drops to 26% for qualified equipment placed in service in 2033 and reduces again to 22% for qualified equipment placed in service in 2034. The credit is scheduled to disappear after 2034. These credits are available to second homes.
Qualified expenditures include costs for site preparation, assembly, installation, piping, and wiring for the following:
1. Qualified solar electricity generating equipment for your U.S. residence, including a vacation home.
2. Qualified solar water heating equipment for your U.S. residence, including a vacation home. To qualify for the credit, at least 50% of the energy used to heat water for the property must be generated by the solar water heating equipment. No credit is allowed for solar water heating equipment unless it is certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the state in which your residence is located. Keep the certification with your tax records.
3. Qualified small wind energy equipment for a U.S. residence, including a vacation home.
4. Qualified geothermal heat pump equipment for a U.S. residence, including a vacation home.
5. Qualified fuel cell equipment for your U.S. principal residence. The maximum credit is limited to $500 for each half kilowatt of fuel cell capacity.
6. Qualified biomass heating equipment for your U.S. residence. Note that this expenditure category drops off the table after 2022.
Expenditures for the categories of qualifying equipment listed for 2020-2022 that are placed in service in 2023-2034 remain eligible for the credit, except for expenditures for qualified biomass heating equipment. After 2022, biomass heating equipment expenditures are no longer eligible for this credit. For 2023-2034, the Inflation Reduction Act makes expenditures for qualified battery storage technology, as defined in the Act, eligible for the credit.
Claiming the Credits
These credits can only be claimed for expenditures on a “home,” which can include a house, condo, co-op apartment, houseboat, mobile home, or a manufactured home that conforms to federal manufactured home construction and safety standards. You should keep proof of how much is spent on qualifying equipment, including any extra amounts for site preparation, assembly, and installation. Clients also should keep records to show when installations are completed and placed in service because credits can only be claimed for the year when that happens.
Your tax professional at Meadows Urquhart can assist with these complicated rules. The IRS has also published a list of “Frequently Asked Questions” on its website:
