Energy Efficient Home Improvement Credit

What is the Energy Efficient Home Improvement Credit?

If you’re in the process of making some energy efficient improvements to your home, we have some good news for you! You may be able to take advantage of the Energy Efficient Home Improvement Credit. But what exactly is it?

Think of the Energy Efficient Home Improvement Credit as an incentive from the government to encourage you to make your home greener and lower your carbon footprint.

The idea is simple. When you upgrade certain aspects of your home to be more energy efficient, like installing solar panels, upgrading insulation, or getting energy-efficient windows, the government gives you a tax credit as a reward. By taking advantage of this tax credit, you can lower the amount of taxes you owe and potentially get a bigger refund.

Not only do energy-efficient upgrades save you money on your taxes, but they can also save you money on your energy bills. The more energy efficient your home is, the less energy you’ll use, which means lower utility bills. It’s a win-win situation all around: you save money, and you help the environment.

Who qualifies for the Energy Efficient Home Improvement Credit?

Before diving into the details of claiming the Energy Efficient Home Improvement Credit, it’s important to ensure that you meet all the IRS’s eligibility requirements.

Energy Efficient Home Improvement Credit eligibility requirements:

• Your primary residence must be located within the United States.
• You’re making upgrades to your existing home. The credit is not for newly constructed homes built with energy efficiency in mind.
• The home you’re improving is your primary residence, which means you live there for most of the year. If you’re a landlord or use the home solely for business purposes, you do not qualify for the Energy Efficient Home Improvement Credit.
• If you use your home for both residential and business purposes, you may be eligible for partial credit. In this case, the credit you can claim depends on how much of your home is designated for personal use and business use. If less than 20% of your home is used for business, you get the full credit. If more than 20% of your home is used for business, you’ll get a partial credit.

Which upgrades qualify for the Energy Efficient Home Improvement Credit?

Not every home upgrade qualifies for the Energy Efficient Home Improvement Credit. Here’s a breakdown of the projects that qualify.

Envelope components

Your home’s envelope components are the components that separate the outside from the inside, like doors, windows, etc. To qualify, these upgrades must be expected to last for at least five years.

• Exterior doors must meet Energy Star requirements. The credit is capped at $250 per door and $500 in total.
• Exterior windows and skylights must meet the requirements for the Energy Star Most Efficient certification. The credit is limited to $600 in total.
• Insulation and other air sealing systems must meet International Energy Conservation Code (IECC) standards. There is no specific credit limit, except for a maximum of $1,200 per year.

Home energy audits

Home energy audits are tests that determine how much energy your home uses, where inefficiencies exist, and what you can do to make your home more efficient. To qualify for a tax credit of up to $150, your home energy audit must:

• Be done by a home energy auditor who has been certified by one of these qualified certification programs, or who is overseen by a qualified home energy auditor.
• Includes a written report that outlines an estimate of the energy and cost savings of the improvements, lists the qualified home energy auditors’ employer identification number (EIN) or other type of taxpayer identifying number, and the name of the qualified certification program the auditor was certified through.

Residential energy property

If you're upgrading to an energy-efficient appliance that meets the Consortium for Energy Efficiency (CEE) highest efficiency tier, you could claim up to $600 per item in tax credits. These include:

• Central air conditioners
• Natural gas, propane, or oil water heaters
• Natural gas, propane, or oil hot water boilers and furnaces

You can claim the tax credit for the cost of the energy property, as well as the costs of installation and the electrical components needed, like feeders, sub-panels, etc.

Is there a heat pump tax credit?

Heat pumps are integral parts of a home’s heating and cooling system, pulling heat inside during colder months and pushing heat outside during warmer months. They are an environmentally friendly alternative to traditional furnaces and air conditioners.

Thinking about upgrading to a heat pump? There isn’t a credit specifically called the “heat pump tax credit.” But the good news is that you can take advantage of the Energy Efficient Home Improvement Credit to reduce the amount of taxes you owe and potentially increase your refund when you file.

Tax credit for installing energy efficient heat pumps

If you’re upgrading your heat pump or biomass stove or boiler this year, and it has a thermal efficiency rating of at least 75%, you could claim the Energy Efficient Home Improvement Credit.

Heat pump upgrades covered by the Energy Efficient Home Improvement Credit

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

For heat pump projects, you can claim 30% of the project costs, or up to $2,000. For example, if the total cost of upgrading your heat pump amounts to $1,000, you could get a credit for $300, which is 30%. However, if the total cost is significantly higher, let’s say $15,000, you can claim a credit for a maximum of $2,000.

What is 25C tax credit?

If you’re in the market for home upgrades to make your home more energy efficient, you may have heard about the 25C tax credit and may be wondering if your upgrades qualify.

The 25C tax credit is the section of tax code for the Residential Clean Energy Credit. The Residential Clean Energy Credit is worth up to 30% of the costs of qualified equipment. Thanks to the Inflation Reduction Act, the credit now covers even more ground.

Projects that qualify for the Residential Clean Energy Credit

• Solar energy: This includes solar panels, which generate electricity from sunlight. It also includes solar-powered water heaters that contribute to at least half of the home's water-heating capacity. It's worth noting that solar water heaters for swimming pools and hot tubs are not eligible for the credit.
• Wind energy: Residential wind turbines that generate electricity, with a capacity of up to 100 kilowatts, can qualify for the credit. These turbines harness the power of the wind to produce clean, renewable energy for homes.
• Geothermal energy: Geothermal heat pumps are another eligible technology. These pumps use the natural heat stored beneath the Earth's surface to provide heating, cooling, and hot water. To qualify, the pumps must meet federal Energy Star guidelines.
• Fuel cells: Fuel cells that rely on renewable resources, like hydrogen, to generate power for a home are also eligible for the tax credit. These fuel cells must have a minimum power generation capacity of 0.5 kilowatts to qualify.
• Battery storage: With the increasing popularity of renewable energy sources, like solar and wind, battery storage has become essential for storing excess energy generated during peak production times. These battery storage technologies are also eligible for the Residential Clean Energy Credit.

Will there be an energy tax credit in 2024?

Yes, you can take advantage of the Energy Efficient Home Improvement Credit and claim the maximum credit for qualified upgrades this year and every year until 2033. You can also claim the Residential Clean Energy Credit until 2034.

By investing in clean-energy technologies, you can only contribute to a more sustainable future but also qualify for valuable tax credits to offset the costs of eco-friendly upgrades.

Is replacing HVAC systems tax deductible?

While there isn't a specific tax deduction for replacing an HVAC system, there are potential tax benefits available through other means, such as energy efficiency tax credits and home improvement deductions.

• Energy efficiency tax credits: As discussed earlier, certain energy-efficient upgrades, including HVAC systems, may qualify for tax credits under programs like the Energy Efficient Home Improvement Credit. This credit can help offset the cost of upgrading to a more energy-efficient HVAC system that meets specific efficiency standards.
• Home improvement deductions: While the cost of replacing an HVAC system generally isn't deductible as a direct expense on your federal income taxes, you may be able to include it as part of your home's adjusted basis when calculating capital gains taxes if you sell your home.

Tax laws and deductions can be complex, and eligibility for tax benefits may vary depending on individual circumstances. It's always a good idea to consult with a qualified Tax Pro to understand how replacing your HVAC system may impact your tax situation and to explore potential tax-saving opportunities available to you.

IRS Form 5695: Applying for residential energy credits

If you've installed a qualifying heat pump or made another upgrade and you're ready to claim those valuable tax credits, you'll need to familiarize yourself with IRS Form 5695. This form is specifically designed for claiming residential energy credits, including the tax credit for installing a heat pump.

A step-by-step guide to navigating Form 5695

• Gather your documentation: Before you start filling out the form, gather all the necessary documentation related to your heat pump installation, or any other energy-efficient home improvements you made during the year. This may include receipts, invoices, and certification documents proving that your heat pump, and other updates, meets the eligibility requirements.
• Complete Part I: Part I of Form 5695 requires you to provide basic information, such as your name, address, and filing status. Make sure to fill out this section accurately and completely. Part I is where you report your Residential Clean Energy Credits such as solar energy, wind energy, or fuel cell energy. Enter the total allowed credit amount on Schedule 3, line 5.
• Calculate your credits: In Part II of Form 5695, you'll calculate the total amount of Energy Efficient Home Improvement credits you're eligible to claim. This includes any credits for energy-efficient upgrades other than the heat pump, such as windows, doors, or insulation.
• Complete Part III: Part III is where you'll calculate the specific credit amount for your heat pump installation. You'll need to enter information about the cost of the heat pump and any other eligible expenses, as well as the percentage of the credit you're eligible for. Part III is used for all eligible energy-efficient home improvements.
• Add up your credits: Once you've completed Parts II and III, add up the total amount of credits you're eligible to claim and enter on Schedule 3, line 5.
• Transfer to your tax return: Finally, transfer the total amount of credits from Form 5695 to the appropriate line on your tax return. This may be Line 14 of Form 1040 or Line 10 of Form 1040NR.
• File your return: After completing Form 5695 and your tax return, file them with the IRS by the tax -filing deadline. Be sure to keep a copy of Form 5695 and any supporting documentation for your records.

By following these steps and accurately completing Form 5695, you can claim the heat pump tax credits you're entitled to and enjoy valuable savings on your taxes. If you have any questions or need assistance, don't hesitate to reach out to a qualified Tax Pro for guidance.

Investing in energy-efficient upgrades for your home not only benefits the environment but also offers significant financial advantages. From reducing utility bills to qualifying for valuable tax credits, there are plenty of reasons to make the switch to a more sustainable living space.

By taking advantage of tax credits like the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit (25C Tax Credits), you can go green while enjoying valuable tax savings.

Sorting through the ins and outs of energy efficient tax credits can be complicated. Work with a Tax Pro who can help you get it right.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

More about Mark Steber Our Editorial Policy