Which Home Improvements Qualify for Energy Tax Credit

Nov 25, 2022 | Energy Conservation

Homeowners who have been thinking about making home improvements that improve the energy efficiency of their home will be excited to learn that the Inflation Reduction Act, which was signed into law this past August, provides certain tax incentives for American citizens to go green and save money.

 

A whopping $4.5 billion will be made available for rebates to be distributed through state governments to establish programs. The funds are scheduled to be available through September 30, 2031.

 

Thanks to this act, going green is now easier than ever. For example, you may be able to reduce your tax bill if you install certain energy-efficient doors and windows or appliances like water heaters, furnaces, and air conditioners. Some families, depending on income, might also qualify for rebates on the purchase of energy-efficient appliances.

 

The Benefits of the Energy-Efficient Home Improvement Credit

A tax credit many homeowners are familiar with is the Nonbusiness Energy Property Credit which expired in 2021. Not all is lost though. The Inflation Reduction Act has not only revived it, but it also now greatly improves the provisions of the credit. It has been appropriately renamed as the Energy Efficient Home Improvement Credit.

 

Under the previous terms, the credit allowed for 10% of the costs of installing energy-efficient insulation, windows, doors, roofing, and other energy-oriented improvements within your home. The credit also allowed for 100% of the costs of installing certain energy-efficient water heaters, heat pumps, air conditioning systems, furnaces, hot water boilers, and fans. However, the credit had a $500 lifetime limit that dramatically restricted the overall potential of the credit.

 

The good news is that the credit is back under the previous terms for the 2022 tax year. But, beginning in 2023, the value of the credit will jump to 30% of the costs for qualifying home improvements made in the calendar year. The reach of the credit is also growing and will also include costs for some biomass stoves and boilers, electric panels, and home energy audits. However, roofing and air-circulating fans will no longer qualify. 

 

Additionally, the $500 lifetime limit is now a $1,200 annual limit. That means that if you spread your projects out over time, you can claim the maximum credit each year. Annual limits for specific qualifying improvements have also been improved:

  • $150 for home energy audits
  • $250 for an exterior door ($500 total for all exterior doors)
  • $600 for exterior windows and skylights, central AC, electric panels, natural gas, propane or oil water heaters
  • $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (this is an exception to the $1,200 annual limit)

 

This tax credit is extended through 2032. Eligible home improvements after 2024 will only be allowed if the manufacturer of an item creates a product identification number for the item, and the individual claiming the credit includes the product identification number on their tax return.

 

The Benefits of the Residential Clean Energy Credit

Another tax credit catching the eye of homeowners is the Residential Energy Efficient Property Credit, which was also retitled under the Inflation Reduction Act and is now known as the Residential Clean Energy Credit. The credit, which was set to expire in 2024, is also extended through 2034.

 

The Inflation Reduction Act increases the credit amount available to consumers. Before the extension, a credit could be claimed for 26% of the cost to install qualifying solar, wind, geothermal, biomass, or fuel cell-based electricity-production devices and in-home temperature regulators. Note that the fuel cell credit has a $500 limit for each half-kilowatt of capacity.

 

This credit amount was going to drop to 23% in 2023 and expire in 2024. Now, the Inflation Reduction Act raises it to 30% from 2022–2032. In 2033, it will drop to 26% for 2033 and then 22% in 2034, after which it will expire.

 

The Inflation Reduction Act also modifies the scope of this tax credit. Beginning in 2023, it applies to certain battery storage technology, but does not apply to biomass furnaces and water heaters.

 

The Benefits of the Alternative Fuel Refueling Property Credit

The Alternative Fuel Refueling Property Credit expired in 2021, but the Inflation Reduction Act has brought it back through 2032. It’s a credit homeowners should know about. This one will allow you to claim 30% (up to $1,000) of the costs of equipment used to charge an electric vehicle or equipment that stores/dispenses alternative fuel for motor vehicles.

 

As of 2023, the Inflation Reduction Act will also apply to bidirectional charging equipment, which can either charge the battery of an electric vehicle or discharge the battery onto the grid.

 

Benefits of High-Efficiency Electric Home Rebates

The High-Efficiency Electric Home Rebate Program isn’t technically a tax credit, but it does provide incentives for energy-efficient purchases. The program is part of the Inflation Reduction Act and provides rebates to low- and middle-income families who invest in energy-efficient electric appliances. To qualify, a family’s total annual income must be under 150% of their resident area’s median income.

 

Other rebates include:

  • $840 for a stove, oven, or heat pump clothes dryer
  • $1,750 for a heat pump or water heater
  • $8,000 for a heat pump for space heating or cooling

Rebates for some non-appliance upgrades, including:

  • $1,600 for insulation, air sealing, and ventilation
  • $2,500 for electric wiring
  • $4,000 for electric load service center upgrades

 

Other Property-Related Tax Credits

Installing energy-efficient appliances aren’t the only potential tax credits that may be available. In some cases, home improvements can be deducted as medical expenses if they are medically necessary. Home office deductions can allow you to claim a part of your home that you use for work purposes.

 

Don’t Overlook the Value of Qualified Tax Advice

Tax credits can provide a great incentive for homeowners to make energy-efficient upgrades to their homes. If you are considering any of these improvements, it might be best to talk to a qualified tax expert who can help make sure everything is done properly and in the most advantageous way within the rules.

 

There are also a few caveats and things to know. For example, rebates can’t be more than 50% of the cost of an electrification project if a household’s income is 80%–150% of the resident area’s median income. Families are also limited to $14,000 in total rebates under the program. A good accountant can help make sense of all of it.

 

The Texas state Tax Incentive Assistance Project page is a resource that can let you know of any other tax credit opportunities. You can also learn more about the Inflation Reduction Act on the White House’s page with examples of how you can save money on energy-efficient upgrades and read our blog post on why it’s worth considering improving your home’s energy efficiency. 

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