There are great opportunities for any individuals that are planning to make improvements to their home’s energy efficiency this year. With the passing of the Inflation Reduction Act of 2022, the amount of energy credits have been increased as well as the range of eligible expenses.
Eligibility
There are two credits that you should be focusing on related to the improvements, the Energy Efficient Home Improvement Credit and the Residential Energy Clean Property Credit. These credits can be claimed by taxpayers who carry out qualifying improvements on their primary dwelling in the same year. Typically, a primary dwelling is the place where you spend the majority of their time. However, there might be instances where taxpayers can claim energy-related credits for specific enhancements to a secondary home, provided that said home is not used for rental purposes. Additionally, renters who acquire energy-efficient appliances and related products for their rental dwellings may also be entitled to claim these tax credits.
Energy Efficient Home Improvement Credit (“EEHIC”)
The Energy Efficient Home Improvement Credit can be claimed for a range of home improvements that fulfill specific energy efficiency criteria. These encompass:
- Exterior doors
- Windows and skylights
- Insulation materials
- Central air conditioners
- Heat pumps and heat pump water heaters
- Biomass stoves and boilers
- Home energy audits
Generally, the maximum annual credit that a taxpayer can lay claim to is as follows:
- $1,200 for energy property costs and particular energy-efficient home enhancements, subject to limitations on doors ($250 per door, $500 total), windows ($600), and home energy audits ($150)
- $2,000 annually for qualified heat pumps, biomass stoves, or biomass boilers.
Note: The actual credit amount a taxpayer can obtain each year corresponds to a percentage of the total improvement costs incurred during the year of installation. In certain circumstances, the credit might be capped. Also, the improved residence must be an existing domicile located within the United States.
One of the most advantageous aspects of the EEHIC is its absence of a lifetime dollar limit. This means that a taxpayer can claim the maximum annual credit for each year they undertake qualifying improvements, extending all the way until 2033. However, the EEHIC is non-refundable and cannot be carried over to subsequent tax years. It might prove to be good tax planning to approach large projects by distributing the work over multiple years instead.
Qualifying Expenses for the Residential Clean Energy Credit (“RCE”)
Individuals who invest in renewable energy solutions for their primary residence may be eligible to claim the Residential Clean Energy Credit. Examples of projects are included below:
- Solar, wind, and geothermal power generation
- Solar water heaters
- Fuel cells
- Battery storage
Generally, the credit amount corresponds to a percentage of the total improvement cost in the year of installation. For the tax years from 2022 through 2032, this percentage is at 30%. Importantly, there are no annual maximums or lifetime limits in place. The Residential Clean Energy Credit is applicable for qualified enhancements to both new and existing primary residences situated within the United States.