IRS Issues Helpful Information Re: Home Energy Tax Credits for Individuals

May 22, 2023

On May 4, 2023, the IRS published IR 2023-97 to remind taxpayers that making certain energy-efficient updates to their homes could qualify them for home energy tax credits.

The credit amounts, and types of qualifying expenses, were expanded by the Inflation Reduction Act of 2022. Taxpayers who make energy improvements to a residence may be eligible for expanded home energy tax credits.

What Taxpayers Need to Know

Taxpayers can claim the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit for the year the qualifying expenditures are made.

Homeowners who improve their primary residence will find the most opportunities to claim a credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences. Property owners cannot claim this credit.

IRS encourages taxpayers to review all requirements and qualifications at irs.gov/homeenergy for energy-efficient equipment prior to purchasing. Additional information is also available on energy.gov, which compares the credit amounts for tax year 2022 and tax year 2023.

Energy Efficient Home Improvement Credit

Taxpayers who make qualified energy-efficient improvements to their home after January 1, 2023, may qualify for a tax credit of up to $3,200 for the tax year the improvements are made.

As part of the Inflation Reduction Act, beginning January 1, 2023, the credit equals 30% of certain qualified expenses:

Qualified energy efficiency improvements installed during the year, which can include things like:

Exterior doors, windows, and skylights
Insulation and air sealing materials or systems

Residential energy property expenses such as:

Central air conditioners
Natural gas, propane, or oil water heaters
Natural gas, propane, or oil furnaces and hot water boilers
Heat pumps, water heaters, biomass stoves, and boilers
Home energy audits of a main home

The maximum credit that can be claimed each year is:

$1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150)
$2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers

The credit is available only for qualifying expenditures to an existing home, or for an addition or renovation of an existing home, and not for a new construction. The credit is nonrefundable - which means taxpayers cannot get back more from the credit than what is owed in taxes, and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

Taxpayers who invest in energy improvements for their main home that includes solar, wind, geothermal, fuel cells, or battery storage may qualify for an annual residential clean energy tax credit. A credit is also available for certain improvements other than fuel cell property expenditures made to a second home that taxpayers live in part-time and not rented to others. The Residential Clean Energy Credit is worth 30% of qualified expenditures for 2022-2033 installations.

Qualified expenditures include the costs of new, clean energy equipment including

Solar electric panels
Solar water heater
Wind turbines
Geothermal heat pumps
Fuel cells
Battery storage technology (beginning in 2023)

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

Solar water heaters certified by the Solar Rating Certification Corporation, or a comparable entity endorsed by the applicable state
Geothermal heat pumps that meet Energy Star requirements are in effect at the time of purchase
Battery storage technology with a capacity of 3-kilowatt hours or greater

The credit is available for qualifying expenditures in your existing home or a new construction. There is no annual or lifetime dollar limit except for fuel cell property. The taxpayer can claim the credit every year that eligible improvements are made until 2023 when the credit begins to be phased out.

Being a nonrefundable credit, the credit amount received cannot exceed the amount of tax liability, but the taxpayer may carry forward the unused amount of the credit to reduce tax liability in future years.

See additional information at IRS.gov on qualifying residences and information for taxpayers who also use their home for a business.

Form 5695, Residential Energy Credits is used to figure and claim your residential energy credits. A taxpayer must claim the credit for the tax year when the property is installed, not merely purchased.

Good Recordkeeping and Related Sources

Taxpayers are encouraged to keep good records of purchases and expenses during the time the improvements are made. This will assist in claiming the applicable credit during tax filing season.

Other Resources

If you need additional guidance regarding how this IRS announcement may affect you, please reach out to your Herbein team member through the form below.

Article contributed by Cecilia Watson