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2 Home Energy Tax Credits You Need to Know About

Naman Bajaj
January 29, 2024
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Did you know that you can save significantly on your tax bill by installing solar panels on your rooftop or having a heat pump installed in your house? It's like receiving a green loan without the need to repay anything.

As part of the Inflation Reduction Act of 2022, the U.S. government is projected to reduce climate-warming greenhouse gases by 40% by 2030. To reach that target, it’s empowering Americans by making it more affordable for them to do energy-efficiency updates to their homes through two different home energy tax credits:

  • Residential Clean Energy Credit
  • Energy Efficient Home Improvement Credit

Both of these tax credits allow you to claim a 30% energy tax credit on qualifying energy-efficient home expenditures, and you can use them each tax year for improvements made till 2032. But there are some significant differences between the two:

Residential Clean Energy Credit: Green power generation and storage

What does it focus on?

If you have installed renewable energy for your home, you can claim the Residential Clean Energy Credit. This applies to all solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, battery storage technology, and the associated labor costs.

Who can claim it?

As a homeowner or renter, you may claim this credit for improvements to your primary home, where you live most of the time. Homeowners can also claim it for their secondary home, where they live part-time and do not rent to others. Landlords or property owners cannot claim this benefit.

Break down the numbers for me

The Residential Clean Energy Credit provides a 30% income tax credit, helping taxpayers to reduce the income tax they owe. There’s no annual limit to the credits that you can claim in a year. For instance, if you get both solar electricity and battery storage installed in your home, you can claim 30% of the purchase price as a tax credit for both of them.

This is applicable for each year till 2032. The credit percentage drops to 26% for properties installed in 2033 and 22% for properties installed in 2034.

You can carry forward any excess credit and apply it to reduce the tax you owe in future years.

How do I apply for it?

You would have to fill in Part I of IRS Form 5695, which covers the Residential Clean Energy Credit.

Energy Efficient Home Improvement Credit: Energy-efficient home upgrades

What does it focus on?

The Energy Efficient Home Improvement Credit offers a 30% tax credit on qualifying energy-efficient home expenditures. This is applicable on energy efficient upgrades such as electric or natural gas heat pumps, electric or natural gas heat pump water heaters, central air conditioners, natural gas or propane or oil water heaters, natural gas or propane or oil furnaces or hot water boilers that meet or exceed the specific efficiency tiers established by the Consortium for Energy Efficiency.

Who can claim it?

As a homeowner, you can only claim it on your primary residence. Unlike the Residential Clean Energy Credit, it cannot be claimed on additional properties, even if the taxpayer lives in them part-time.

Break down the numbers for me

The Energy Efficient Home Improvement Credit provides a 30% income tax credit, up to $2000, helping taxpayers reduce the income tax they owe. For some equipment like heat pumps and heat pump water heaters, you can claim 30% of the purchase price, but up to $2,000 as a tax credit, while for others, it could be a little lower. For instance, the tax credit for new windows is 30% of the purchase price but up to $600. You can find the complete list of all the equipment here.

There’s an annual limit of $3200 for it, but there’s no lifetime dollar limit. Owners can claim the maximum amount every year till 2032.

Unlike The Residential Clean Energy Credit, you can’t carry over anything earned over your tax burden in a financial year.

How do I apply for it?

You would have to fill in Part II of IRS Form 5695, which covers the Energy Efficient Home Improvement Credit.

Here’s the difference between the two, in a nutshell:

Category

Residential Clean Energy Credit

Energy Efficient Home Improvement Credit

Area of focus

Green power generation and storage

Energy-efficient home upgrades

Credit amount

30%

30%

Annual limit

None

$3,200

Applicable for

Primary residences and qualifying secondary residences

Primary residences only

Excess credit

Carries forward to future tax years

Does not carry forward to future tax years

Apart from these federal policies, there are also state-wise policies and incentives for renewables and home energy efficiency improvements that can further help you reduce your tax bills and expenses.

Naman Bajaj
January 29, 2024

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