It’s time to send in those tax returns. Looking at what we did last year prompts us to think about how to save more this year. At the same time, home energy tax credits and rebates are rising, thanks to the Inflation Reduction Act.
Is it time to make home efficiency upgrades? Is it worthwhile to look into Energy Efficient Home Improvement Credits? Where does a homeowner get started with upgrades, anyway?
Here’s the lowdown.
This Year’s Credits Are Bigger. Check ‘Em Out.
The $500 lifetime maximum rebate is effective through December 31, 2022. Now, in 2023 and beyond, taxpayers can generally receive 30% back for an upgrade, up to $1,200 in a tax year. Here are some energy-saving improvements that qualify:
- New insulation for more effective heating.
- New, Energy Star certified exterior windows or doors to better insulate the home.
- More efficient boilers or HVAC systems.
There are maximum credit amounts for a few specific items, like the $600 for windows. But in general, a homeowner can get back 30% of the investments, up to $1,200 per year.
In addition to credit caps for any energy-efficientinstallations or improvements this year (2023 and beyond), there are annual total limits. The overall total limit for an efficiency tax credit in one year is $3,200.
What does the total limit include? Your $1,200 max for upgrades plus the furnace, boiler, and central HVAC credit. The plus you can get? Up to $2,000 annually for any heat pumps, heat pump water heaters, and biomass stoves or boilers. (But note: A few of the appliances — hot water boilers, for example — must be claimed by tax year 2027.)
PS: Energy Star geothermal heat pumps can get another tax credit in addition to the $3,200 limit.
Ready to Start? Make an Appointment for a Home Energy Audit.
OK, so how do we choose which project(s) to do? It starts with an audit! Why? Because a certified home inspection auditor can tell the homeowner exactly where and how the home could use significant efficiency boosts.
The certified home inspection report gets you $150 for your total tax credit, per IRC Sec. 25C(b)(6)(A).
So, a homeowner should start keeping records of work and payments starting with the audit report.
It’s clear. With rising home energy costs posing challenges to homeowners, the Inflation Reduction Act does offer some really helpful ways to cut down on tax bills. At the same time, it’s an incentive to finally get some of those home improvement projects done!
What if you’ve already started making energy-efficient changes? You can still qualify for tax savings. The Inflation Reduction Act allows for retroactive credits for work started any time since 2021, and finished between January 2022 and December 2032. Nice.
Here Are Some Tips to Get the Most Out of the Tax Credits.
Plan to get the most from the annual credit limits in the Inflation Reduction Act. As EnergyStar.gov suggests, it can make sense to spread energy-efficient upgrades over several years.
First, to save the most on electric bills, do this. Improve your attic’s insulation and replace windows before paying for a heat pump. Once you finish these projects in the same tax year, you could claim your tax credit of up to $3,200.
Then, maybe you’ll want to buy an efficient water heater next year, to claim the 30% tax credit for that work, up to the $2,000 limit. You could claim an additional $600 for an upgraded electric system that handles your new and improved water heater.
You might decide to replace your current windows with one or two new Energy Star certified windows yearly, putting those upgrades to the $1,200 credit.
Remember, you may claim the upgrades as Nonbusiness Energy Property Credits yearly, for many years to come. And if you don’t owe enough federal taxes to maximize your credits this year, the remaining credit carries over into the next tax year. Just be sure to claim each project only once!
Now, what if you are also claiming separate energy tax credits from the IRS? That’s OK. You may take full advantage of the Inflation Reduction Act credits, too.
Can you still get the state tax credits for energy-efficient upgrades if you claim them on your federal return? Check your own state’s policies on this. Some states reduce their own credits to taxpayers who claim the federal credits.
Want updates on the law and its rebates and tax credits for clean energy? The White House offers a helpful source of continuing information. Speak to your own tax pro if you need case-specific advice.
Modest-Income Households: Get Thousands in Rebates and Purchasing Discounts
Does your household qualify for low- and moderate-income purchase rebates? Check out these helpful provisions in the High-Efficiency Electric Home Rebate Act and the HOMES Rebates:
The government offers up to $8,000 back for store purchases. These purchase discounts enable homes to convert their gas HVAC systems to heat pumps.
There’s also $840 in store credit available for converting gas to electric stoves. And there’s $1,600 in store credit for new insulation.
Modest-income households can get cash back for weatherization projects. In fact, since 1976, the government has offered savings to households for making homes more weather-efficient. This might involve better insulation, or getting more energy-efficient home appliances. How is energy savings proved? By electronic audits or by comparing your home’s actual energy savings. Learn more about weatherization savings and rebates.
There’s an allowance for claiming up to 80% of the costs of proven electricity-savings projects. The provision gives an average household $372+ back every year. In homes that use a lot of energy, the savings can go up to $8,000 for households that lower their energy use by 35%. Even if your household lowers its energy use by 20%, there’s still up to $4,000 in money back.
Who can apply for weatherization assistance? People who earn 200% or below the Federal Poverty Income Level, which means a single-person household earning up to $27,180, or a four-person household making up to $55,500.
Renting? Living on a multi-unit property? No worries! You’re eligible for these savings.
Thinking About Rooftop Solar Panels? Incentives Are Expanding.
Installing rooftop solar can easily cost $20K. Fortunately for interested homeowners, there is also a boost in the Residential Clean Energy Credit for home solar systems. This credit lets homeowners take 30% off the cost of the panels and batteries on their federal returns.
Claim the credit on the return for the tax year during which you installed home solar. The homeowner may take that 30% off no matter how expensive the home solar costs are. This makes the credit is super helpful for homeowners who want quality solar heating and electricity systems. Those credits cover:
- Photovoltaic (PV) panels, including necessary equipment and sales tax.
- Wiring and installation costs.
- Applicable permitting fees.
- Stand-alone solar power storage batteries that store at least three kilowatts.
These newer, higher home solar tax credits are valid through 2032. They go down to 26% in 2033, and down further to 22% in 2034. Then, the solar credit “sunsets” (unless it’s reauthorized by lawmakers). At this point, people have a lot of time to work on their home solar power plans.
Installing a solar system is a big job. But it has its rewards — and they involve more than savings on electricity bills. Buying your own solar system can add value to a home. (This is usually not the case if the system is leased. And leasing wouldn’t qualify for the tax credit in any case.)
Good news for co-op members: You can claim credit for your portion of a community-owned solar system purchase, or for a co-op’s solar purchase.
Supporting References
EnergyStar.gov: Air Source Heat Pumps Tax Credit (updated Dec. 30, 2022).
The U.S. Internal Revenue Service via IRS.gov: Frequently Asked Questions About Energy-Efficient Home Improvements and Residential Clean Energy Property Credits (Dec. 22, 2022).
Office of State and Community Energy Programs Community via Energy.gov: Energy Programs – Home Energy Rebate Programs.
Tobie Stanger for Consumer Reports: How the New Solar Tax Credit in the Inflation Reduction Act Works (Aug. 17, 2022).
Courtney Lindwall for the Natural Resources Defense Council via NRDC.org: How-To – A Consumer Guide to the Inflation Reduction Act (Oct. 24, 2022).
And as linked.
Photo credits: Max Vakhtbovych and ready made, via Pexels.