Residential Energy Credits: Claim up to $3200 Annually
So that the United States can wean itself off of foreign sources of energy, tax laws were enacted to provide tax credits to offset the cost of installing energy efficient improvements to residences. There have been several laws enacted over the years to provide credits for energy efficiency. The most recent update these laws is the Inflation Reduction Act of 2022 (IRA), allowing a total credit of up to $3,200 annually.
Tax law distinguishes between 2 types of improvements, which differ as to whether the property credit can be applied to the installation costs. The Energy Efficient Home Improvement Credit be applied to energy efficiency improvements, such as energy-efficient windows, doors, roofs, and added insulation, but not the installation costs. On the other hand, the Residential Clean Energy Property Credit for residential energy property, such as water heaters and stoves that use biomass fuel, and high-efficiency heating and air-conditioning systems, can also be applied to the installation costs. The residential energy-efficient property credit covers investments in alternative sources of energy, such as solar, wind, geothermal, and fuel-cells. The calculation for the credits, with detailed instructions, is on Form 5695, Residential Energy Credits. Both credits are added together on Form 1040, Schedule 3, then listed on Form 1040.
These credits must be claimed in the year the property was installed, NOT when it was purchased, and it is only available for new property, not used property. The property must be reasonably expected to last at least 5 years. The residence must be in the United States, and be 1 of the following types of residences:
- house
- mobile home
- condominium
- manufactured home conforming to Federal Manufactured Home Construction and Safety Standards
- cooperative apartment
- houseboat
The real estate property must be in the United States and used by the taxpayer as a residence. Some credits require the property to be the main residence of the taxpayer, while other credits may be applied to another residence that is not the main residence. Some property requires ownership, but renters do qualify for some credits.
Both credits are limited to the percentage of property not used for business. Property used solely for business does not qualify.
- If business-use % ≤ 20% (nonbusiness-use % ≥ 80%),
- then the total amount of credit can be claimed.
- If 220% < business-use % < 100%,
- cclaimable credit is proportional to the nonbusiness use percentage.
Example 1:
- business-use percentage: 40%
- nnonbusiness-use percentage: 60%
- claimable credit = 60%
Example 2:
- business-use percentage: 20%
- nnonbusiness-use percentage: 80%
- claimable credit = 100%
Because the residential energy credits are nonrefundable, other nonrefundable credits — such as the foreign tax credit, the credit for child and dependent care expenses, education tax credits, the retirement savings contributions credit, and the child tax credit — that are claimed by the taxpayer may reduce the amount of residential energy credits that can be claimed, since the total of the nonrefundable credits cannot exceed the taxpayer's ordinary income tax liability. Moreover, the residential energy credits can be used to offset both regular and AMT liability.
The tax basis of the home must be adjusted downward by the amount of any residential energy credits claimed. So if a taxpayer owns a home with an adjusted basis of $100,000 and claims $3,000 worth of residential energy credits for the home, then the adjusted basis of the home = $100,000 − $3,000 = $97,000.
Energy Efficient Home Improvement Credit
The nonbusiness energy property credit can only be used for improvements to a principal residence within the United States. There is an annual aggregate limit of $1200 for this credit. Owners of cooperatives or condominiums can split the cost of installing the equipment with other unit owners. The taxpayer must be the original user of the equipment, which must be expected to last at least 5 years. Any unused credit that was limited by tax liability cannot be carried forward.
For years 2022 through 2032:
- annual total credit limit = $1200
- qualifying property must be placed in service after 2022 but before 2033.
- 30% of the amounts paid by the taxpayer for certain qualified expenditures, including:
- qualified energy efficiency improvements installed during the year,
- residential energy property expenditures during the year, and
- home energy audits during the year.
The credit = 30% of the cost of exterior windows and skylights and 100% of the cost of other qualified improvements, with an annual $1200 per taxpayer limit.
Specific maximum dollar limits apply for specific improvements:
- $600 for any qualified energy property item, including:
- central air conditioners
- natural gas, propane, or oil water heaters
- natural gas, propane, or oil furnaces and hot water boilers
- improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders installed with building envelope components or other eligible property and enabling its installation and use
- $250 for 1 exterior door, a total of $500 for all exterior doors
- combined limit of $600 for all exterior windows and skylights
- $2,000 for heat pumps, heat pump water heaters, biomass stoves, boilers
- lower of $150 or 30% of costs for home energy audits:
- To qualify for the credit, a home energy audit must be for the inspection of a dwelling located in the United States, owned or used by the taxpayer as a principal residence.
- The home energy auditor must provide a written report to the taxpayer identifying the most significant and cost-effective energy efficiency improvements for that dwelling, including an estimate of the energy and cost savings for each improvement.
- The auditor must meet the certification or other requirements specified by the Department of the Treasury and the Internal Revenue Service in forthcoming guidance.
- Roofs no longer qualify for the credit, but air-sealing insulation does.
Starting in 2025 qualified products will require a qualified product identification number assigned to qualified manufacturers by the IRS.
The nonbusiness energy property credit is only available for those improvements that are approved by the IRS. The improvements must meet energy efficiency standards approved by the IRS to qualify for the credit. Qualified energy efficiency improvements are any energy efficient building envelope component that satisfies the energy conservation criteria set by tax law. A building envelope component is any material or system designed to reduce heat loss or gain.
Taxpayers can rely on the manufacturers' written certification that its products qualify for the credit. The certification does not have to be attached to the tax return, but it should be retained as a record.
Residential Clean Energy Property Credit
The residential clean-energy property credit can be claimed for up to 30% of the cost for qualified residential solar panels, solar water heating equipment, wind turbines, and geothermal heat pumps, including on-site preparation, assembly, and installation. However, heating equipment for a pool or hot tub does not qualify for the credit. If the heating equipment heats both a home and a pool or hot tub, then only the prorated cost allocated to the home is deductible. The property must be placed in service by 2022 through 2034.
There is no dollar limit on the credit, and most residences qualify, even if it is not the taxpayer's principal residence. This credit can only be claimed for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, not for a newly constructed home. Any unused credit that was limited by tax liability can be carried forward. However, the credit is limited to a percentage of the cost depending on when the property was placed in service:
- 30% for property placed in service in 2022 through 2032
- 26% for property placed in service in 2033
- 22% for property placed in service in 22034
Some types of property eligible for this credit include the following:
- Solar electric property (solar panels)
- Qualified expenditures do not include roofing materials and structural components.
- However, solar roofing tiles and solar roofing shingles that serve as solar electric collectors may qualify for the credit.
- Solar water heating property (solar water heaters)
- Property must be certified by the Solar Rating Certification Corporation or comparable entity endorsed by the state government where the property is installed.
- Small wind energy property
- Geothermal heat pump property
- must meet Energy Star requirements
- Fuel cells
- Battery storage technology
- capacity ≥ 3 kilowatt-hours
- maximum credit: $500 for each ½ kilowatt of capacity, or
- $1,667 per ½ kilowatt of capacity if the residence is occupied by 2 or more individuals
An unused amount of the credit may be carried forward the to reduce tax liability in future tax years. The property must meet energy efficiency requirements, including applicable Energy Star requirements, and in some cases, minimum capacities. The seller of the property should know whether the property qualifies for the credit.
You can find more detailed information about energy efficiency requirements at:
The IRS has also published this fact sheet on energy efficiency requirements:
Which Credits Are Available for Homeowners and Renters
Owners are eligible for all credits, but renters can only claim credits for home energy audits and residential energy property credits. However, only the residential energy property credits can be claimed for a residence that is not a main residence.
Category | Owned or rented | Main or other residence |
Building envelope components | Owned home only | Main residence only |
Home energy audits | Owned or rented home | Main residence only |
Residential energy property | Owned or rented home | Main or other residence (subject to business or non-use limitations) |
Heat pumps and biomass stoves | Owned home only | Main residence only |
Examples
Now, let's look at a few examples to see how the individual credit limits and aggregate limits apply to qualified expenses.
Example 1:
You buy 2 exterior doors, some windows and skylights, and 1 central air conditioner for the prices shown. The total credits add up to $1,700.
- 2 exterior doors: $1,000 each
- 30% of each $1,000 door’s cost = $300
- per door limit = $250
- total credit for doors: $500
- windows and skylights: $2,200
- 30% of $2,200 of expenditures for windows and skylights: $660
- Credit limit for such expenditures: $600
- 1 central air conditioner: $5,000
- 30% of $5,000 paid for the central air conditioner: $1,500
- $600 per item limit for energy property
- Total credits = $500 + $600 + $600 = $1,700
- Energy Efficient Home Improvement Credit aggregate limit: $1,200
- Claimable credit: $1,200
Example 2:
- 2 exterior doors: $1,000 each
- 30% of each $1,000 door’s cost = $300
- per door limit = $250
- total credit for doors: $500
- windows and skylights: $2,200
- 30% of $2,200 of expenditures for windows and skylights: $660
- Credit limit for such expenditures: $600
- Electric heat pump: $5,000
- 30% of $5,000 paid for the electric heat pump: $1,500
- exempted from both the $600 per item limit and the $1,200 aggregate limit, but subject to the $2,000 limit for heat pumps.
- Total credits = $500 + $600 + $1,500 = $2,600
- Claimable credit: $2,600
Example 3:
- 2 exterior doors: $1,000 each
- 30% of each $1,000 door’s cost = $300
- per door limit = $250
- total credit limit for doors: $500
- windows and skylights: $2,200
- 30% of $2,200 of expenditures for windows and skylights: $660
- Credit limit for such expenditures: $600
- home energy audit: $600
- 30% of $600: $180
- Limit: $150
- Total credit for doors, windows, skylights, and audit: $1,250
- Energy Efficient Home Improvement Credit aggregate limit: $1,200
Since $1,250 exceeds the $1,200 aggregate limit for such expenses, you are limited to claiming $1,200.
Example 3.1:
Then you buy an electric heat pump for $8,000, 30% of which = $2,400.
- Electric heat pump: $8,000
- 30% of $5,000 paid for the electric heat pump: $2,400
- exempted from both the $600 per item limit and the $1,200 aggregate limit
- aggregate limit for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers: $2,000
- Total claimable credits = $1,200 + $2,000 = $3,200
- Claimable credit: $3,200
So, your total credit for the year = $3,200.
Notes
Inflation Reduction Act of 2022
Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA) amended the credits for:
- energy efficient home improvements under § 25C of the Internal Revenue Code
- residential energy property under § 25D of the Code.
Historical Notes
- The Consolidated Appropriations Act for 2021 (H.R. 133), signed into law on December 27, 2020, allows a 26% rate to apply to property placed in service during 2021 and 2022, then decreases to 22% in 2023. Also qualifying for this credit is a biomass fuel property with a 75% efficiency rating.