Thinking about switching to renewable energy? Energy tax credits can help you go green with the federal renewable energy and residential energy efficiency tax credit has been extended to 2034 and expanded to cover more people beginning in 2023.
Tax credits are available through the Energy Efficient Home Improvement Credit for investments in energy-efficient appliances, renovations, and audits.
Tax credits are available through the Residential Clean Energy Credit for the installation of renewable energy systems like solar panels, wind turbines, and geothermal heating.
Solar, wind, fuel-cell, and geothermal energy systems installed in both your primary and secondary residences qualify for the tax credit.
What are energy tax credits targeting home improvements?
Two credits for energy-efficient home modifications and residential clean energy equipment were extended and made more valuable by the Inflation Reduction Act in August 2022.
Energy Efficient Home Improvement Credit
Prior to its extension and increase by the Inflation Reduction Act, the energy-efficient home repair credit was known as the Nonbusiness Energy Property Credit and provided a lifetime credit of $500 up until December 31, 2022. The Inflation Reduction Act renamed the credit the Energy Efficient Home Improvement Credit and increased its value to up to $1,200 annually for qualified property placed in service on or after January 1, 2023, and before January 1, 2033. If you install a biomass stove or boiler, or buy a heat pump, you may be eligible for a yearly subsidy of up to $2,000.
If you make eligible home renovations over the course of the new credit’s 10-year duration, you might get your tax saved of up to $12,000, up from just $500 under the old credit, because the new credit has an annual cap rather than a lifetime limit.
Which home improvements qualify for the Energy Efficient Home Improvement energy tax credit?
After January 1, 2023, the maximum annual credit is $1,200 from 30% of the sum of all amounts paid for qualified home renovations. In addition to the $1,200 maximum, there are annual caps on the following items:
- Home energy audits: $150
- Exterior doors: $250 per door (up to $500 per year)
- Exterior windows and skylights, $600
There is a separate annual aggregate credit maximum of $2,000 for electric or natural gas heat pump water heaters/heat pumps, and biomass stoves and biomass boilers, in addition to the $1,200 limit mentioned above. To put it another way, the highest annual credit you may receive for making energy-efficient improvements to your home is $3,200.
Residential Clean Energy Credit
Inflation Reduction Act of 2022 (IR 2022) extended and enlarged the Residential Clean Energy (RCE) Credit, a tax credit for renewable energy. There is a 30% tax credit for renewable energy home improvements that meet specific criteria. The previous energy credit was extended and revised by the Inflation Reduction Act through 2034, with new percentage credit rates and the inclusion of battery storage technology as an eligible expenditure.
This deduction is available for assets that are put into operation between December 31, 2021, and January 1, 2033. There will be no more access to credit after December 31, 2034, and the rate will have gradually decreased from 26% in 2033 to 22% in 2034.
Which equipment qualifies for the Residential Clean Energy Credit?
Solar, wind, geothermal, and fuel-cell equipment are all eligible for the federal tax credit for clean energy installations in private homes.
- Solar panels, or photovoltaics, for generating electricity
- Solar-powered water heaters for water used inside the home
- Wind turbines for residential use
- Geothermal heat pumps that meet federal Energy Star guidelines
- Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home
- Battery storage technologies (Battery storage technology must have a capacity of at least 3 kilowatt hours.)
Are roofing expenditures covered by the Residential Clean Energy Credit?
Generally speaking, the Residential Clean Energy Credit cannot be used to recoup the costs of repairing or replacing a roof for the sole purpose of installing solar panels and associated equipment. Investments in solar roofing equipment, such as solar roofing tiles and shingles, qualify for the credit because they can be used for both solar energy generation and as a standard roofing material.
To determine if you may cut costs any further, research any applicable state and municipal programs and utility incentives.
How do energy tax credits work?
The government provides tax credits for purchases of energy-efficient goods and services to encourage individuals to make these purchases. For energy-efficient home upgrades including insulation, windows, and doors, as well as solar panel systems and other qualifying renewable energy sources, a taxpayer may be eligible for a credit against their income tax burden.
Are energy tax credits refundable?
Tax credits for renewable energy are not refundable. If your credit is high enough, you can effectively pay no tax at all. If your total tax liability is less than your energy credit, you will not receive a refund of the difference.
Will these energy tax credits make home improvements more cost-effective?
In most cases, this is the case. These credits help to offset the initial investment required to make home modifications that enhance energy efficiency and so reduce heating and cooling costs. When added to the savings from energy-efficient home upgrades, these tax credits can be quite beneficial.
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