Tax Credits for Energy-Efficient Home Improvements

03 Apr 2023 Tax Credits for Energy-Efficient Home Improvements

If you were looking to make a few home improvements, you might save some money on your projects under the Inflation Reduction Act, if you make your home more energy efficient. While the bill’s main objective is to address climate change, it helps homeowners adopt more eco-friendly measures and incentivizes people to go green and save money.

Homeowners can cut their tax bills by installing new energy-efficient windows, doors, water heaters, furnaces, and air conditioners. This is due to the legislation extending and enhancing two tax credits that reward “green” upgrades to your home.

Low-and moderate-income families may also qualify for rebates if they purchase energy-efficient appliances. Making a few changes makes it easier for homeowners to go green.

Energy Efficient Home Improvement Credit

The Inflation Reduction Act brought back the Nonbusiness Energy Property Credit that expired at the end of 2021 but with some improvements and a new name – the Energy Efficient Home Improvement Credit.

The previous expired credit was worth 10% of the costs of installing specific energy-efficient insulation, windows, doors, roofing, and similar energy-saving improvements in your home. You could also claim the credit for 100% of the costs of installing certain energy-efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers, and air circulating fans.

However, there was a lifetime limit of $500 for the credit (e.g., credits taken in previous years counted towards the limit). There was also a $200 lifetime limit for new windows. These limits severely restricted the overall value of the credit. There were also other individual credit limits for air circulating fans ($50); some furnaces and boilers ($150); and certain water heaters, heat pumps, and air conditioning systems ($300).

The credit is revived for the 2022 tax year, and the old rules apply. However, starting this year (2023), the credit equals 30% of the costs for all eligible home improvements made during the year. It is also expanded to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. Roofing and air-circulating fans will no longer qualify for the credit. Some energy-efficiency standards are updated as well.

In addition, the $500 lifetime limit is replaced by a $1,200 annual limit on the credit amount (the lifetime limit on windows will go away, too). So, if you spread out your qualifying home projects, you can claim the maximum credit each year. The annual limits for specific types of qualifying improvements have been modified. Beginning in 2023, they will be:

• $150 for home energy audits;
• $250 for an exterior door ($500 total for all exterior doors);
• $600 for exterior windows and skylights; central air conditioners; electric panels and specific related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and
• $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,200 annual limit may be exceeded).

For eligible home improvements after 2024, the credit will only be allowed if the manufacturer of any purchased item creates a product identification number for the item and the person claiming the credit includes the number on their tax return.

Finally, the revised credit will be extended through 2032.

Residential Clean Energy Credit

The second credit homeowners can use the current Residential Energy Efficient Property Credit, which also got a new name under the Inflation Reduction Act. It’s now called the Residential Clean Energy Credit and has been extended through 2034.

In addition to a name change and extension, the Inflation Reduction Act also boosts credit. Previously, the credit was worth 26% of the cost to install qualifying systems that use solar, wind, geothermal, biomass, or fuel cell power to produce electricity, heat water, or regulate the temperature in your home.

The credit amount was also scheduled to drop to 23% this year and expire in 2024. Under the Inflation Reduction Act, the credit amount jumps to 30% from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.

The scope of the credit is adjusted under the Inflation Reduction Act. Starting in 2023, it no longer applies to biomass furnaces and water heaters but will apply to battery storage technology with a capacity of at least three kilowatt hours.

For more information about the tax credits available under The Inflation Reduction Act, contact a professional at Haynie & Company today.

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