Take Advantage of Federal Home Energy Tax Credits
The push towards renewable energy has been a priority of President Biden’s since taking office. Not only is it seen as a way to proactively manage climate change, but it ensures the United States remains a global leader in clean energy technology, manufacturing, innovation, and production. In fact, there have been several parcels of legislation, including the Inflation Reduction Act, which offer lucrative incentives for clean energy investments. While there are credits available for the purchase of electric vehicles (EVs), many are surprised to learn that some are available for qualifying home improvements as well. Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit offer valuable tax savings. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit is available for energy-efficient improvements made to homes after January 1, 2023. Current homes or improvements made as part of a renovation or addition may be eligible for a tax credit in the year the taxpayer made improvements, up to $3,200. The credit amounts to 30% of qualified expenses, which include energy efficiency improvements such as exterior windows and doors; energy property expenses such as central air conditioners, water heaters, biomass stoves, and boilers; and home energy audits.
Heat pumps, biomass stoves, and biomass boilers that qualify can receive a maximum credit of $2,000 per year. Other energy property costs and improvements can receive a maximum of $1,200 in credits, except for the following:
- Exterior doors ($250 each, $500 maximum)
- Exterior windows ($600)
- Home energy audits ($150)
Other qualified expenses included in the $1,200 maximum for efficiency improvements include skylights, insulation, air sealing systems and materials, central air conditioners, and water heaters that run on natural gas, propane, or oil.
The credit is nonrefundable, meaning homeowners won’t get more for the credit than what they owed on their taxes. Excess credit amounts cannot be rolled forward to future years.
Residential Clean Energy Credit
Investments in clean energy can also qualify taxpayers for credits through the Residential Clean Energy Credit. These improvements include making the switch to wind, solar, fuel cells, geothermal, or battery storage.
Clean energy equipment that was installed between 2022 and 2033 is eligible for a credit good for 30% of the cost. Eligible equipment includes:
- Wind turbines
- Solar water heaters
- Geothermal heat pumps
- Solar electric panels
- Fuel cells
- Battery storage technology
To qualify for the credit, solar water heaters, geothermal heat pumps, and battery storage technology need to meet certain standards. The Solar Rating Certification Corporation (or similar endorsed entity) needs to approve the solar water heaters, while geothermal heat pumps need to comply with Energy Star requirements. Battery storage technology needs to have at least 3 kilowatt hours of capacity.
Unlike the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit applies to both existing homes and newly constructed ones. There are also no annual or lifetime limits on claiming the credit, except for fuel cell property.
Every year a taxpayer installs equipment that is eligible under this credit, they can take and apply it, until the credit phases out in 2033. While this is also a nonrefundable credit, unused credit can be applied in future years.
Who is eligible for these credits?
The people who are most eligible to receive home energy tax credits are homeowners who are making improvements to a primary residence. However, there are also scenarios where renters or owners of second homes used as residences may also be eligible. Unfortunately, landlords are not able to benefit from these incentives.
Contact Us
The emphasis on energy efficiency can result in significant federal tax savings for New Jersey and Pennsylvania homeowners. Consult with a tax professional to determine if you can take advantage of these savings. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.
©2023 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice.
Please consult your tax advisor concerning your specific situation.