Understanding The Energy Efficient Home Improvement Credit
In an effort to reduce energy costs and move toward cleaner energy sources, the Inflation Reduction Act of 2022 provides federal tax credits and deductions to homeowners who make energy-efficient upgrades to their residences. One of these credits is known as the Energy Efficient Home Improvement Credit. In the article, we’ll discuss what it is, how much it’s worth, and who is eligible to claim it.
What is the Energy Efficient Home Improvement Credit?
The Energy Efficient Home Improvement Credit, formerly known as the Nonbusiness Energy Property Credit, is a non-refundable tax credit that can reduce your income tax liability. Under the Inflation Reduction Act of 2022, the credit amount has increased and no longer has a lifetime limit. You may be eligible to take this tax credit if you make certain home improvements, purchase qualifying equipment, or participate in an energy audit.
How Much is The Credit?
Thanks to the Inflation Reduction Act of 2022, the credit no longer has a lifetime limit of $500. Now, eligible taxpayers may receive up to $3,200 annually for qualifying items placed into service between January 1, 2023, and January 1, 2033.
The actual value of the credit is equal to 30% of the amount paid for a qualifying purchase, as long as it does not exceed the total allowed for that item. There is a yearly maximum credit of $1,200 for building envelope materials (door, windows, and insulation), energy audits, and energy property (air conditioners, water heaters, furnaces, and hot water boilers). You may also receive up to $2,000 annually for electric or natural gas heat pumps or water heaters, biomass stoves, and biomass boilers.
What Improvements Qualify For The Energy Efficient Home Improvement Credit?
The following energy-efficient improvements made to an existing home are eligible for the Energy Efficient Home Improvement Credit:
- Exterior doors – 30% of costs up to $250, but no more than $500
- Exterior windows and skylights – 30% of costs up to $600
- Insulation materials – 30% of costs
- Central air conditioners – 30% of costs up to $600, including labor
- Water heaters (natural gas, propane, or oil) – 30% of costs up to $600, including labor
- Furnaces and hot water boilers (natural gas, propane, or oil) – 30% of costs up to $600, including labor
- Heat pumps (electric or natural gas), heat pump waters heaters (electric or natural gas), biomass stoves, and biomass boilers – 30% of costs, including labor
- Home energy audits – $30% of costs up to $150
You may also receive a credit ( 30% of costs up to $600, including labor) for improvements or replacements of panelboards, branch circuits, or feeders that are installed with qualifying exterior doors and windows, or insulation materials. Improvements made to new construction do not qualify for the tax credit.
Per the IRS, all items must meet or exceed certain energy efficiency requirements to qualify for the credit. This may include Energy Star ratings, criteria set by the International Energy Conservation Code (IECC), or the Consortium for Energy Efficiency (CEE). Panelboards, branch circuits, and feeders must be installed according to the National Electric Code and have a load capacity of 200 amps or greater.
Can I Claim The Credit If I am Renting My Home?
Renters who make eligible improvements that are not reimbursed by their landlords may take the Energy Efficient Home Improvement Credit if the following requirements apply:
- The home is located in the United States and it’s your principal residence; and
- You paid for any of the qualifying improvements allowed under the tax credit, including home energy audits.
Doors, windows, skylights, and insulation purchases are excluded, as these are only available to taxpayers who own and use the property as their principal residence.
If I Use My Home For Business, Do I Still Qualify?
Taxpayers who use a property solely for business purposes are not eligible to take the Energy Efficient Home Improvement Credit. If you use less than 20% of your home for business, however, you may claim the full credit. For amounts over 20%, you’ll need to calculate the amount of credit by including only the portion of your expenses that are used for non-business purposes.
With all the different variables and requirements for the Energy Efficient Home Improvement Credit, it’s easy to get confused. If you think you may qualify for this tax credit or any others, be sure to consult with a tax professional. At MoneySolver, we offer affordable tax preparation services for individuals and small business owners. Call 855-476-6920 today for a free consultation.