Home Energy Improvement Credit Is Enhanced
- Learn the history of the home energy improvement credit.
- Find information regarding the credit percentage and annual credit limit.
- Learn the per-item credit limit.
- Find information about home energy audits.
- Learn about the identification number requirement.
- Discover information regarding other credit issues.
- Find a tip to maximize the credit.
The home energy improvement credit goes all the way back to 2006, providing a tax credit for making energy-saving improvements to a taxpayer’s home. This tax benefit should have expired after 2021, but a law change has given the credit renewed life. It has also substantially enhanced it beginning in 2023.
Prior to 2023, the credit had a lifetime cap of $500. Many taxpayers had taken advantage of it in the previous 16 years. However, others could not remember if they had used the entire lifetime credit during those years. As a result, with a lifetime tax benefit of only $500, and a small credit rate of only 10%, the credit had become less of a motivator for taxpayers to make energy-saving improvements to their homes. Consequently, taxpayers frequently disregarded it.
Now, this credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. Beginning in 2023, a $1,200 annual limit replaces the minimal $500 lifetime limit. The credit rate also increases to 30%.
Annual home energy improvement credit limits
The following are the annual credit limits by improvement item.
- Energy Property: $600 if the property meets the most recent International Energy Conservation Code standard in effect as of the beginning of the calendar year which is 2 years prior to the calendar year in which such component is placed in service. This type of property includes:
- An electric or natural gas heat pump water heater.
- An electric or natural gas heat pump.
- A central air conditioner.
- A natural gas, propane, or oil water heater.
- A natural gas, propane, or oil furnace or hot water boiler.
- Biomass stoves and boilers
- Any insulation material or system, including air sealing material or system, specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on that dwelling
- Doors: $250 in the case of any exterior door. $500 in the aggregate with respect to all exterior doors meeting the applicable Energy Star requirements. For example, if a new front door costs $1,000, the credit will be $250 since $300 (30% of $1,000) exceeds the $250 limit.
- Windows: $600 for the aggregate of all windows and skylights that meet Energy Star's most efficient certification requirements.
- Heat Pumps: $2,000 for the aggregate of heat pumps, heat pump water heaters, biomass stoves, and boilers.
- Home Energy Audit:$150 (one time). “Home energy audit” means an inspection and written report identifying the most significant and cost-effective energy efficiency improvements with respect to the dwelling unit. This includes an estimate of the energy and cost savings with respect to each such improvement. It is conducted and prepared by a home energy auditor. The auditor must meet the certification or other requirements specified by the Secretary of the Treasury.
The one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.
Identification Number Requirement
The credit is not allowed unless the energy-saving item is produced by a qualified manufacturer. The taxpayer must also include the qualified product identification number of the item on their tax return for the tax year that they claim the credit. However, that requirement does not take effect until after December 31, 2024, giving qualified manufacturers time to comply.
Other Credit Issues
- Improvements include only those installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer and originally placed in service by the taxpayer.
- The components must have a life expectancy of at least 5 years.
- The credit can apply to manufactured homes.
- Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property qualify.
- The credit is claimed on the return for the year the property is installed, even if paid for in a prior year.
- It is a nonrefundable personal tax credit and is allowed against the alternative minimum tax (AMT) if the taxpayer is subject to the AMT.
- There are no credit carryover provisions if the taxpayer does not fully utilize the credit in the year of the home energy improvements.
- Unlike the credit for solar installations, this credit doesn't have any specific prohibitions against swimming pools or hot tubs.
Tip To Maximize the Credit
This credit now has an annual credit limit instead of a lifetime credit limit. So, a taxpayer can spread the expenditures over multiple years to avoid the annual and per-item credit limits. For example, say a taxpayer wishes to replace all the windows in their home and completes the work in one year. The taxpayer’s credit would be limited to the per item $600 credit for windows and skylights. However, if the taxpayer spreads the replacements out over multiple years, they would get a credit of $600/year.
Want to know how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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