Home Improvement Tax Credits Available to Homeowners Looking to Adopt Energy Efficiencies
Provided by: Nathan Cacka, CPA, Financial Advisor & Manager
The Inflation Reduction Act, passed in 2021, includes provisions that incentivize homeowners to invest in energy-efficient home improvements. The credits are available for certain energy-efficient upgrades to a primary residence, such as the installation of solar panels, the replacement of windows and doors, and more. The amount of credit varies depending on the specific upgrade, but it can range from a few hundred to a few thousand dollars.
Here are some highlights to take note of:
Heating, Ventilation and Air Conditioning Systems (HVAC)
Homeowners may be eligible for a tax credit for the installation of certain energy-efficient HVAC (heating, ventilation and air conditioning) systems. Specifically, homeowners can claim a tax credit up to 30% of project costs for the following:
- Natural gas and oil furnaces – Up to $600 maximum credit.
- Central A/C – Up to $600 maximum credit.
- Boiler – Up to $600 maximum credit.
- Air source heat pumps – Up to $2,000 maximum credit.
- Biomass stoves/boilers – Up to $2,000 maximum credit.
Homeowners may be eligible for a tax credit for the installation of certain energy-efficient water heaters. You can claim a tax credit up to 30% of project costs. For example, the installation of qualifying electric heat pump, natural gas, propane or oil water heaters that meet certain energy efficiency standards results in the following credits:
- Gas water heaters – Up to $600 maximum credit.
- Heat pump water heaters – Up to $2,000 maximum credit.
Homeowners may be eligible for a tax credit for the installation of certain energy-efficient building products. You can claim a tax credit up to 30% of project costs. For example, the installation of insulation, new windows and skylights, exterior doors and roofing could mean the following:
- Exterior doors – Up to $500 maximum credit per year ($250 per door).
- Windows and skylights – Up to $600 maximum credit.
- Insulation – Up to $1,200 maximum credit.
Residential Clean Energy
The second type of credit homeowners can take advantage of is the Residential Clean Energy Credit, which is now extended through 2032. Previously, this credit was set at 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.
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 Residential Clean Energy tax credits fall within the following categories:
- Geothermal heat pumps – Qualified geothermal heat pump property is available when it uses the ground or ground water as a thermal energy source (to heat) or as a thermal energy sink (to cool) a home and is ENERGY STAR certified. You can find the credit amounts for prescribed periods at www.energystar.gov.
- Small wind turbines – A wind turbine collects kinetic energy from the wind and converts it to electricity that is compatible with a home’s electrical system. A qualified small wind energy property uses a wind turbine to generate electricity for use in connection with a home in the United States and used as a residence by the taxpayer. You can find the credit amounts for prescribed periods at www.energystar.gov.
- Solar energy systems – Solar water heaters come in a wide variety of designs, including a collector and storage tank, and use the sun’s thermal energy to heat water. You can find the credit amounts for prescribed periods at www.energystar.gov.
- Fuel cells – Fuel cells enable technology for the hydrogen economy and have the potential to change the way we power our nation, offering cleaner, more-efficient alternatives to the combustion of gasoline and other fossil fuels. You can find the credit amounts for prescribed periods at www.energystar.gov.
- Battery storage technology – Qualified battery storage technology must have a capacity of not less than 3 kilowatt hours. Existing homes and new construction qualify, and both principal residences and second homes qualify. Rentals do not. You can find the credit amounts for prescribed periods at energystar.gov.
- There is a $1,200 aggregate yearly tax credit maximum for all building envelope components, home energy audits and energy property.
- There is a $2,000 aggregate yearly tax credit limit for all electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers.
- Therefore, the maximum total yearly energy-efficient home improvement credit amount may be up to $3,200.
It’s important to note that tax credits have different eligibility requirements and maximum amounts, so homeowners should review the guidelines carefully to determine eligibility and the specific amount of the credit that can be claimed. It’s best to seek the advice of an experienced and knowledgeable accountant or financial firm that can help uncover potential or missed opportunities to help you save on your tax bill.
In addition to these federal credits, check with your local PUD as many provide home energy-efficiency rebate programs for a wide range of upgrades to your home.
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