The Inflation Reduction Act of 2022 (IRA) created or expanded tax credits available to those who make energy-saving upgrades to their homes. Be sure to take advantage of these recently expanded tax credits this Fall, as many of the eligible items for your home relate to the cooler temperatures ahead.
The Energy Efficient Home Improvement Credit (EEHI)
The amount of the EEHI credit available to homeowners who make certain energy-efficient upgrades took a sizable jump through an expansion of Section 25C. This program permitted taxpayers to claim a total of $500 of credit against their federal income taxes for qualifying purchases over the course of the taxpayers’ lifetimes (beginning 2006). The enhanced rules more than double the general limitation to $1,200 and allow the credit to be claimed on an annual basis beginning January 1, 2023, and running until the expiration date of the credit, currently set for December 31, 2032. An additional $2,000 in annual credit is available for purchases of very specific types of heat pumps, water heaters, and other equipment, making for a total possible annual credit of $3,200 available to taxpayers who spend enough on qualified purchases.
The amount of credit is equal to 30% of the cost of qualifying improvements and expenditures. Such amounts are then subject to specific category-based limitations, in addition to the overall annual limitation described above. Credits claimed for purchases of building envelope components designated as qualified energy improvements under the law are limited to:
- Up to $250 per door for exterior doors, with an annual limit of $500 (2 doors).
- $600 total for exterior windows.
- Amounts spent on insulation materials and air sealing materials/systems are not subject to any separate annual limitation outside of the total 30%, up to $1,200 amount.
The rules also limit credits claimed annually for certain residential energy property expenditures to $600 each for:
- Central air conditioners
- Furnaces (gas, propane, or oil)
- Water heaters (gas, propane, or oil)
- Panel-board (breaker box) improvements
On the other hand, the rules allow a more generous separate $2,000 annual credit for 30% of expenditures on the below items with a thermal efficiency rating of at least 75%:
- Electric or natural gas heat pumps
- Electric or natural gas heat pump water heaters
- Biomass stoves and biomass boilers
Under the current rules, the EEHI credits are nonrefundable (meaning that they can reduce your federal tax liability for the year to zero, but the IRS won’t pay you a refund on your federal taxes to the extent these credits reduce them below zero), and excess credits don’t carry forward. More info from the IRS here: https://www.irs.gov/credits-deductions/energy-efficient-home-improvement-credit
The Residential Clean Energy Property Credit (RCE)
Another existing credit that was significantly enhanced by the IRA is the Section 25D, Residential Clean Energy Credit (RCE). In general, the IRA extended the availability of the RCE through 2034, modified the credit rates to step down as the provision gets closer to expiration, and expanded the list of eligible purchases to include certain battery storage technology.
There is generally no overall limit on the amount of credit that can be claimed under the RCE, with the exception of the new fuel cell property limits discussed below. The taxpayer can take a credit against federal income taxes for 30% of the cost of qualified expenditures made for property placed in service anytime beginning in 2022 and extending through 2032. Under the current law, the credit rate drops to 26% in 2033, 22% in 2034, and the credit will fully phase out for property placed in service after 2034.
Qualifying residential clean energy expenditures include:
- Solar panels, including certain solar roof tiles and shingles (and possibly roofing costs related to the installation; the cost of a full roof replacement wouldn’t be eligible.)
- Solar water heaters
- Wind turbines used to generate electricity
- Geothermal heat pump expenditures
- Battery storage technology expenditures (capacity of at least 3 kilowatt hours; installed after Dec. 31, 2022)
- Fuel cell property expenditures (up to $500 for each half kilowatt of capacity)
The RCE can be claimed on any dwelling unit located in the United States and used by the taxpayer as a residence, except in the case of fuel cell property, in which case the dwelling unit must be the primary residence of the taxpayer for the related costs to qualify for the credit.
Unlike the EEHI, the RCE can be carried forward to future tax years if it’s not usable in the year that the qualifying property is installed. More info from the IRS here: https://www.irs.gov/credits-deductions/residential-clean-energy-credit
Contact Us: These expanded tax breaks for clean energy upgrades to homes can make your home more comfortable and the ultimate cost more affordable, but the credits aren’t without their complexities. If a taxpayer doesn’t owe enough federal tax in the year the EEHI credit is claimed, they will likely lose the benefit of some or all of the credit. Therefore, tax planning surrounding when a taxpayer completes certain energy-efficient upgrades may ensure that usage of the EEHI credit is maximized. Check with your TFG accountant regarding recordkeeping, and retaining receipts to support the claim for purchases to reduce your tax liabilities. Email CPA@fuoco.com.
