Home Energy Tax Credits
Let's talk home energy tax credits!
As our team is in the thick of tax season, we have already noticed an increase in the number of our clients wanting to claim tax credits for their home improvements, such as doors, windows, solar panels, etc. We want to provide additional valuable information regarding these credits and encourage them to do their research beforehand to make sure their improvements and products they are purchasing actually qualify!
These credits are not refundable credits, meaning money doesn't come directly to you in the form of a refund. These credits reduce any tax on your return. So, in order to be able to claim the credit, your income has to generate some tax.
What Are Home Energy Credits?
Home energy credits are tax incentives provided by the federal government to encourage homeowners to invest in renewable energy and energy-efficient improvements. The two main credits available are:
1. Energy Efficient Home Improvement Credit (IRC § 25C) – Covers qualifying energy-efficient upgrades such as insulation, windows, doors, and HVAC systems.
2. Residential Clean Energy Credit (IRC § 25D) – Covers the installation of renewable energy sources like solar panels, wind turbines, and geothermal heat pumps.
Eligibility Requirements
To qualify for these credits, you must:
-Own the home where the improvements were made (renters do not qualify).
-Use the home as your primary residence (for the Energy Efficient Home Improvement Credit).
-Have installed the improvements in the tax year you are claiming them for.
-Very Important: Ensure the upgrades meet the energy efficiency standards set by the IRS. (A good resource is the Energy Star website where you can research the before purchasing the products and seeing what products meet the IRS requirements.https://www.energystar.gov/about/federal-tax-credits )
Types of Qualifying Improvements and Credit Amounts
The IRS allows credits for various energy-efficient upgrades, including:
-Windows, Doors, and Skylights: Must meet Energy Star requirements and have Energy Star certification. Credit limit: up to $600.
-Insulation Materials: Designed to reduce heat loss/gain and meet Energy Star guidelines. Credit limit: up to $1,200.
-Roofing: Energy-efficient asphalt and metal roofs that meet Energy Star standards. Credit limit: up to $1,200.
-HVAC Systems: Energy-efficient central air conditioners, furnaces, and heat pumps that qualify for Energy Star certification. Credit limit: up to $2,000 for heat pumps; up to $600 for other HVAC improvements.
-Water Heaters: Certain high-efficiency gas, oil, and electric water heaters that meet Energy Star guidelines. Credit limit: up to $600.
-Biomass Stoves: Must have a thermal efficiency rating of at least 75% and meet Energy Star qualifications where applicable. Credit limit: up to $2,000.
-Solar Panels: Photovoltaic systems for electricity generation that comply with Energy Star standards. Credit: 30% of total cost with no cap.
-Wind Turbines: Small-scale wind energy systems that meet IRS and Energy Star qualifications. Credit: 30% of total cost with no cap.
-Geothermal Heat Pumps: Must meet Energy Star guidelines and certification requirements. Credit: 30% of total cost with no cap.
-Battery Storage: For renewable energy systems, with a minimum capacity of 3 kWh, complying with Energy Star ratings where applicable. Credit: 30% of total cost with no cap.
How to Claim the Credits
Step 1: Gather Documentation
Before filing your taxes, collect all necessary documents, including:
-Receipts and invoices for materials and installation costs.
-Manufacturer certifications confirming the energy efficiency of the product and Energy Star qualification.
-Any additional paperwork required by the IRS for specific improvements.
Step 2: Fill Out the Proper Tax Forms
To claim the credits, you will need to complete IRS Form 5695 (Residential Energy Credits) and attach it to your tax return (Form 1040). This form helps determine your eligible credit amount.
Step 3: Calculate Your Credit
Each credit has different calculation rules:
-Energy Efficient Home Improvement Credit: Covers 30% of qualified expenses, with an annual limit of $1,200 for most improvements ($2,000 for heat pumps and biomass stoves).
-Residential Clean Energy Credit: Provides a 30% credit for qualifying renewable energy installations, with no annual cap.
Step 4: File Your Taxes
Once you have completed Form 5695, include the calculated credit amount on your Form 1040.
Other Important Considerations
-Carryover Rules: If your tax liability is less than your credit, you may be able to carry forward the unused portion to future tax years (applies to the Residential Clean Energy Credit).
-State Incentives: Some states offer additional rebates or credits, so check local programs for extra savings.
-Deadlines: Ensure your upgrades are installed before December 31 of the tax year to be eligible for that year’s credit.
Final Thoughts
Claiming home energy credits can be a great way to lower your tax bill while improving your home's energy efficiency. By keeping track of your expenses and following IRS guidelines, you can maximize your savings and contribute to a greener future.