Are you investing in energy efficient appliances? Doing so may result in some useful tax breaks to lower the cost.
- Does the IRS offer tax breaks for energy-efficient appliances?
- What appliances qualify for energy tax credits?
- Tax credits for energy efficient upgrades and improvements
• Several tax credits exist to lower the cost of going green and upgrading your home or property to be more energy-efficient.
• The Inflation Reduction Act significantly extended and/or expanded several tax benefits available to taxpayers.
• Combined, these tax breaks can amount to thousands of dollars per year and tens of thousands of dollars over the lifetime of the tax benefits.
• Most energy-efficiency related tax benefits that were set to expire at the end of 2021 are extended under existing rules through 2022 and then change to their expanded amounts from 2023 into the 2030s.
Does the IRS offer tax breaks for energy-efficient appliances?
The IRS offers several ways for taxpayers to cut their tax bills through investing in certain energy-efficient appliances and home improvements. This can include upgrades like energy-efficient water heaters, furnaces, air conditioners, windows, doors and similar investments, but also clean vehicles and related equipment.
The IRS makes the energy-efficient equipment tax credits available to most all taxpayers and targets certain ones to low- and moderate-income families, making the transition to going green easier and more affordable.
Recently, the Inflation Reduction Act expanded and/or extended several of these tax benefits. Below, we cover some of the main tax credits you should know for making energy-efficient upgrades and improvements to your home or property.
What appliances qualify for energy tax credits?
Installing alternative energy equipment in your home such as solar panels, heat pumps, windows, doors and roofing can qualify you for a credit up to 30% of your total cost. See the details below for details on the programs available to help you go green while saving on your taxes.
Tax credits for energy efficient upgrades and improvements
There are several tax credits available for energy efficient upgrades and improvements. Take a look at three credits and one rebate program below to see how they work and if they might be able to save you money.
1. Energy Efficient Home Improvement Credit
Recently renamed from the Nonbusiness Energy Property Credit, this tax credit originally expired at the end of 2021. The Inflation Reduction Act changed the fate of this credit by not only reinstating it, but substantially expanding the impact starting in 2023 through 2032.
The old rules apply for 2022, essentially extending the previous credit by one year. Afterwards, the credit for the costs of installing certain energy-efficient upgrades such as home insulation, windows, doors, roofing, and more increases from 10% to 30%. It will also be expanded to cover certain types of stoves, boilers, electric panels, and other related equipment with a greater set of limits (up to $1,200 per year vs. the previous $500 lifetime limit). If you can manage to spread your qualifying home improvement projects throughout the credit’s current, upgraded availability (through December 31, 2032), you could net up to $12,000 in tax credit value over ten years through the Energy Efficient Home Improvement Credit.
The annual limits on the credit for specific types of qualifying home improvements will be enhanced starting in 2023 as well. Specifically, credit limits will be the following:
- Home energy audits: $150
- Exterior doors: $250 per door (up to $500 per year)
- Exterior windows and skylights, central A/C units, electric panels and related equipment, natural gas, propane and oil water heaters, furnaces or hot water boilers: $600
- Heat pumps and biomass stoves and boilers: $2,000 (this one category qualifies to go above the $1,200 annual limit)
2. Residential Clean Energy Credit
This credit, previously called the Federal Investment Tax Credit, originated in 2005 through passage of the Energy Policy Act. The credit provided a credit on the cost of qualified solar systems and has been extended and expanded several times since originally being passed into law. Most recently, you could claim a 26% non-refundable tax credit on qualified costs paid to purchase and install certain qualified solar equipment, fuel cells, or other covered renewable or alternative energy equipment.
The Inflation Reduction Act renamed the credit to the Residential Clean Energy Credit and extended the credit through 2034. Previously, the credit was set to expire in 2024. The Residential Clean Energy Credit will be 30% from 2022 through 2032, when it falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034. There is no limit on the amount of credit for qualified purchases that you can claim each year.
The Inflation Reduction Act also changed the scope of the credit to no longer include biomass stoves beginning in 2023 and to include battery storage technology with a storage capacity of at least three kilowatt hours.
3. Alternative Fuel Refueling Property Credit
Another tax credit that expired at the end of 2021 was given new life by the Inflation Reduction Act. The legislation extended the credit through 2032 and is worth up to 30% of the costs of qualified alternative-fuel-vehicle refueling property installed in the home. The credit is worth up to $1,000.
In most instances, the alternative fuel refueling property covered by this credit comes from the charging equipment used to recharge an electric vehicle. The credit covers more use cases, however, also applying to equipment used to store or dispense an alternative fuel other than electricity, such as fuels that consist of 85% or more of natural gas, liquefied or compressed natural gas, propane, hydrogen or ethanol, in addition to mixtures of biodiesel, diesel and kerosene with 20% or more volume derived from a biodiesel fuel.
High-Efficiency Electric Home Rebates
While not technically a tax credit, this program assists you with lowering the cost of going green. The Inflation Reduction Act added this program to provide rebates to low- and middle-income taxpayers who purchase and install energy-efficient electric appliances. Qualifying for the program will require your family’s total income to be less than 150% of the median income for where you live.
Under the program, qualifying homeowners can install appliances that go toward fully-electrifying their homes, such as heat pumps or electric clothes dryers. The per household rebate cap is $14,000 and households aren’t eligible to claim two rebates for the same upgrade.
How do energy tax credits work?
If you meet the criteria of an energy tax credit covered above, you generally can claim the credit on your return subject to certain limitations. Tax credits reduce the amount of taxes you owe dollar-for-dollar. For example, if you owe $1,000 in federal taxes but are eligible to claim a $1,000 tax credit, your net tax liability drops to zero. These energy credits are non-refundable credits meaning that they can lower your taxes but won’t result in a refund. You may have the opportunity to roll over unused portions of tax credits to future years, allowing you to claim their full value down the road when you have additional tax liability.
How do you claim energy efficient tax credits on your tax return?
To claim the credits, you'll need IRS Form 5695. Work out the credit amount on that form, then enter it on your Form 1040. You should keep your receipts for your purchases as well as the Manufacturer's Certification Statement, so you can prove your claim if the IRS ever conducts an audit.
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