Understanding Home Energy Tax Credits

A couple of federal personal tax credits are available for the installation of certain energy efficient or clean energy property in your home. Expenditures must be for items that meet various energy efficiency standards (e.g., Energy Star).

The energy efficient home improvement credit is available for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, but not for a newly constructed home. The residential clean energy property credit is available for qualifying expenditures incurred for either an existing home or a newly constructed home. Each credit requires the home to be located in the United States and used as a residence by the taxpayer.

Both of these credits are nonrefundable personal tax credits. An unused residential clean energy property credit can be carried forward to reduce tax liability in future years. An unused energy efficient home improvement credit cannot be carried forward.

Energy efficient home improvement credit

The amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures. There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The maximum annual credit amount may be up to $3,200.

An annual $1,200 aggregate credit limit applies to all building envelope components, energy property, and home energy audits (30% of costs up to $150 for such audits).

Building envelope components include:

• Exterior doors (30% of costs up to $250 per door, up to a total of $500)
• Exterior windows and skylights (30% of costs up to $600)
• Insulation materials or systems and air sealing materials or systems (30% of costs)

Energy property (30% of costs, including labor, up to $600 for each item) includes:

• Central air conditioners
• Natural gas, propane, or oil water heaters, furnaces, and hot water boilers
• Certain other improvement or replacements installed in connection with building envelope components or other energy property

A separate annual $2,000 aggregate credit limit (30% of costs, including labor) applies to:

• Electric or natural gas heat pump water heaters
• Electric or natural gas heat pumps
• Biomass stoves and boilers

Residential clean energy property credit

A 30% credit is available for certain qualified expenditures made by a taxpayer for residential clean energy property (including labor costs allocable to such property). This includes expenditures for:

• Solar panels
• Solar water heaters
• Fuel cell property
• Wind turbines
• Geothermal heat pump property
• Battery storage technology

There is no overall dollar limit for this credit. For qualified fuel cell property, there is a general credit limit of $500 for each half kilowatt of capacity.

Home energy audit tax credit

When considering making energy-saving home improvements, it may be helpful to have a home energy audit done. A federal income tax credit is available for home energy audits limited to 30% of the cost of a home energy audit, up to $150 per year (30% of $500 would equal $150). It is also subject, along with building envelope components and energy property, to the annual $1,200 aggregate limit for certain items as part of the energy efficient home improvement credit (see above). If you claim the home energy audit tax credit, the home energy audit should be kept as part of your tax records.

A home energy audit is an inspection and written report for a dwelling located in the United States. The home must be owned and used by the taxpayer as a principal residence and the audit must meet certain requirements.

• The audit must identify the most significant and cost-effective energy efficiency improvements, including an estimate of the energy and cost savings for each improvement.
• The inspection must be conducted or supervised by a qualified home energy auditor.*
• The written report must be prepared and signed by a qualified home energy auditor.
• The audit must be consistent with certain Department of Energy and industry guidelines.

The Department of Energy maintains a list of home energy auditor qualified certification programs at energy.gov.

*A home energy auditor is not required to be a qualified home energy auditor for audits conducted before January 1, 2024. For 2023, the credit can be claimed even if the auditor was not a qualified home energy auditor if the other requirements are met. The home energy audit tax credit cannot be claimed for home energy audits conducted after December 31, 2023, unless the audit is conducted by a qualified home energy auditor.

Examples

Example 1. In the current year, John purchases and installs the following: two exterior doors for $1,000 each; windows for a total of $2,200; and a central air conditioner at $5,000. All property installed met the applicable energy efficiency and other requirements for the energy efficient home improvement credit.

First, 30% of each $1,000 door is $300, but the potential credit is limited to $250 per door, or a total of $500.

Next, 30% of the $2,200 total for windows is $660, but the potential credit is limited to $600 (for windows and skylights).

Finally, 30% of the $5,000 air conditioner is $1,500, but the potential credit is limited to $600 per item for energy property.

Adding these potential credit amounts together totals $1,700, but the $1,200 aggregate credit limit reduces John's energy efficient home improvement credit to $1,200.

Example 2. Assume the same facts as in Example 1 above, except that John purchases and installs a $5,000 heat pump meeting all requirements instead of the central air conditioner. John also pays $600 for a home energy audit.

Here, 30% of the $600 home energy audit is $180, but the potential credit is limited to $150.

Adding the potential credits for the doors ($500), the windows ($600), and the audit ($150) together totals $1,250, but the $1,200 aggregate credit limit reduces this part of the energy efficient home improvement credit to $1,200.

Also, 30% of the $5,000 heat pump is $1,500, which is less than the separate $2,000 aggregate credit limit.

John's energy efficient home improvement credit is equal to $2,700 ($1,200 plus $1,500).

This hypothetical example of mathematical principles is used for illustrative purposes only. Actual results will vary.