Tackling home improvements and reducing your tax bill at the same time? Sounds like a win-win! The recently passed Inflation Reduction Act includes expanded tax credits for energy-efficient home improvements, which some analysts have estimated could save over 100 million households $37 billion a year on their energy bills.
The 2022 Inflation Reduction Act extended and modified two energy-related credits available to homeowners:
- Beginning in 2023, the existing Nonbusiness Energy Property Credit will be restructured as the Energy Efficiency Home Improvement Credit
- The Act renamed and slightly modified the existing Residential Energy Efficient Property Credit to the Residential Clean Energy Credit
Both are tax credits for different types of qualified home energy improvements. And, unlike deductions, these tax credits are direct dollar-for-dollar reductions in your final tax bill. For example, if you owe $800 on your taxes, but claim a credit for an eligible credit equaling $800, that credit cancels out what you owe. In addition, the credits are different in what they cover and can be used simultaneously, resulting in some significant tax savings. Let’s look into each one in more detail.
Energy Efficiency Home Improvement Credit
The original Nonbusiness Energy Property Credit was set to expire at the end of 2021, but the Inflation Reduction Act reactivated it for 2022, allowing homeowners to claim the credit for residential energy property expenditures and energy efficiency improvements made during 2022.
In 2023, the Nonbusiness Energy Property Credit will be restructured as the Energy Efficient Home Improvement Credit, which no longer has a lifetime limit, but limits the annual credit for particular property types.
This credit is generally equal to 30% of:
- A homeowner’s spend on qualified energy efficiency improvements
- Residential energy property expenditures for qualified energy property
- A homeowner’s home energy audit costs
Example rebates available
- Up to $840 for an electric stove, cooktop, range or oven to replace gas
- Up to $1,600 for improving a home’s insulation and sealing energy leaks
- Up to $840 for switching to an electric heat pump dryer
- A tax credit of up to $2,000 for the purchase of an electric heat pump
Do all energy-efficient improvements qualify for the credit?
Not all energy-efficient improvements qualify for tax credits, so it’s important for homeowners to check the manufacturer’s tax credit certification statement before purchasing or installing any new products. The certification statement can usually be found on the manufacturer’s website or with the product packaging. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star-labeled products qualify for the tax credits.
Residential Clean Energy Credit
Homeowners should also check out a second tax credit designed to spur investment in qualifying alternative energy equipment. The Residential Energy Efficient Property Credit was set to expire in 2024. Under the Inflation Reduction Act, the renamed Residential Clean Energy Credit will stay at 30% until 2032, decrease to 26% in 2033, and decrease to 22% in 2034.
The 30% (and 26% and 22%) figure refers to the percentage of the total cost of your alternative energy system and installation that you can get back as a credit. For example, if you spent $21,000 on your system, the 30% Residential Clean Energy Credit would allow you to reduce the amount of money you owe on your taxes by $6,300 (30% of $21,000). There’s no cap on the amount of credit available, except in the case of fuel cell property. Beyond the tax benefit, solar-powered homes also allow homeowners to save hundreds or even thousands of dollars on their energy bills.
FURTHER READING: The Department of Energy’s comprehensive guide for homeowners
Need help taking advantage of tax credits?
The experienced team at FSA has been helping clients with tax preparation and planning for over 40 years. Our team-based approach ensures we have the right expertise to handle even the most complex tax matters for individuals and businesses. Don’t put off your tax planning strategy; let us take care of it for you. Contact the team to schedule a consultation.