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:

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.

Example 1:

Example 2:

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:

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:

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:

Some types of property eligible for this credit include the following:

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.


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


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.

Example 2:

Example 3:

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.

So, your total credit for the year = $3,200.


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:

Historical Notes