Planning home upgrades in the years ahead? Two home energy tax credits you may qualify for are the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit. Both were part of the Inflation Reduction Act passed in 2022 and went into effect starting January 1, 2023.
At first glance, the names of these home energy tax credits seem similar. So what’s the difference between the two? The Residential Clean Energy Credit provides a tax break for property that generates clean energy (think solar power) while the Energy Efficient Home Improvement Credit covers upgrades that help reduce home energy use (like insulation). In this article, we’ll be going into detail about each of these credits.
In this article:
- The Residential Clean Energy Credit allows for federal tax credit on 30% of the costs associated with installation of qualifying clean energy properties.
- The Energy Efficient Home Credit allows up to $1,200 – $2,000 credit for certain energy efficient home improvements.
- Both credits are only available for primary residences. Property owners cannot claim either of these credits on upgrades made to homes they rent to others.
Residential Clean Energy Property Credit
Making clean energy upgrades to your home? You could save on taxes with the Residential Clean Energy Property Credit, which kicked in on January 1, 2023, and carries through until January 1, 2033, when it begins to phase out.
This home energy tax credit has no annual or lifetime limit (except for fuel cell property, which we’ll talk about below). You can also carry this credit forward into subsequent years, making it a flexible — and valuable! — tax credit.
What does the Residential Clean Energy Property Credit cover?
This credit equals 30% of the cost of qualifying clean energy property. Keep in mind that the clean energy property must be new — used clean energy property does not qualify for this credit.
Which clean energy property qualifies for this credit?
- Solar electric panels
- Solar water heaters — must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by your state
- Geothermal heat pumps —must meet Energy Star requirements in effect at the time of purchase
- Battery storage technology — must have a capacity of at least 3 kilowatt hours
- Wind turbines
- Fuel cells
Important note: traditional building components that accompany the installation of a piece of clean energy property do not qualify. For example, you cannot claim the credit on costs associated with roofing components like trusses and shingles that support the solar roofing tiles. Only the solar roofing tiles and solar shingles can qualify for this credit because those pieces are the construction components that actually generate clean energy.
That’s not all! Certain installation costs also qualify for this home energy tax credit.
This IRS offers these examples of qualified installation costs:
- Labor costs for onsite preparation
- Assembly or original installation of the property
- Piping or wiring to connect it to the home
What is the credit limit for fuel cell property?
The IRS stipulates the following fuel cell limits: “Fuel cell property is limited to $500 for each half kilowatt of capacity. If more than one person lives in the home, the combined credit for all residents can’t exceed $1,667 for each half kilowatt of fuel cell capacity.”
Who can claim the Residential Clean Energy Property Credit?
In order to claim this credit, the home:
- Must be owned or rented by you as your primary residence (the IRS states that you must live in it “most of the time”)
- Must be located in the United States
- Can be either new or existing
Attention landlords and property owners: you cannot claim this credit.
What if you use your home for business purposes?
Homes used for business purposes have slightly different qualifications. If the home is used for 100% business purposes (rather than as a primary residence), you do not qualify for this credit.
However, if you use the home only partially for business, you may still qualify. Do you use your home for business use up to 20% of your home (for example, a home office)? Then you qualify for the full credit.
But if more than 20% of the home is used for business purposes, there will be some calculations involved; the credit amount is “based on the share of expenses allocable to nonbusiness use,” according to the IRS.
Is there an income limit to qualify for the Residential Clean Energy Property Credit?
No! This credit is available to anyone, regardless of income. Keep in mind that this is not a refundable tax credit. In other words, the credit amount you receive cannot exceed the tax amount that you owe.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit covers qualifying home improvement projects made to reduce energy consumption completed after January 1, 2023, and before January 1, 2033.
What qualifying improvements are covered under the Energy Efficient Home Improvement Credit?
The following qualifies for this home energy tax credit:
- Exterior doors
- Exterior windows and skylights
- Insulation and air-sealing materials or systems
- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces and hot water boilers
- Electric or natural gas heat pumps
- Electric or natural gas heat pump water heaters
- Biomass stoves and boilers
To qualify for this credit, all of the above must meet certain energy efficiency standards. Read more about the IRS’ energy efficiency criteria here.
How much can you claim under the Energy Efficient Home Improvement Credit?
Unlike the Residential Clean Energy Property Credit, this home energy tax credit does have annual limits.
The maximum annual credits you can claim are:
- $1,200 for energy property costs and certain energy efficient home improvements
- $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers
- $600 for central AC, gas/oil water heaters, gas/oil furnaces, or hot water boilers
Additionally, there are credit limits on certain types of property. They are as follows:
- Doors: $250 per door (for $500 total)
- Windows: $600
You can also claim up to $150 for qualifying home energy audits.
Who can claim the Energy Efficient Home Improvement Credit?
To qualify for this credit, your home must be:
- Owned or rented by you as your primary residence
- Located in the United States
Unlike the Clean Energy Property Credit, only energy efficient improvements made to existing homes qualify for this credit. New homes do not. And just like the other home energy tax credit, property owners who make upgrades to homes they rent to tenants cannot claim this credit.
How do you claim either of these home energy tax credits?
For both home energy tax credits, use Form 5695, Residential Energy Credits. These credits can only be claimed during the tax year that the property was actually installed in your home, not the year it was purchased. A Landmark CPA can help you make sure you’re taking advantage of all qualifying tax credits.