You must complete IRS Form 5695 if you qualify to claim the non-business energy property credit or the residential energy-efficient property credit.
Home improvement credits
In 2022 the Nonbusiness Energy Property credit was enhanced and renamed the Energy Efficient Home Improvement credit. The current version of the credit has been extended through the end of 2022 while the newly enhanced version is in effect for tax years 2023 through 2032.
Also in 2022, the Residential Energy Efficient Property (REEP) credit was enhanced and renamed the Residential Clean Energy (RCE) credit. The RCE credit replaces the REEP credit beginning with the 2022 tax year and runs through 2032 at its full amount with reduced amounts in 2033 and 2034.
Both of these credit will continue to use Form 5695 to calculate your credit and record any available carryover to the following year.
Nonbusiness Energy Property credit through 2022
This credit available through 2022 can reduce your tax bill for some of the costs you incur to make energy-efficient improvements to your home. Your tax credit is up to 10 percent of these costs, with a maximum total lifetime credit of $500 and a lifetime limit of $200 for the windows portion.
Eligible costs include the purchase price and installation charges for efficient heating and air conditioning systems, water heaters, and stoves that run on biomass fuel. You may also claim a credit for the purchase of energy-efficient doors, windows, skylights, certain roofs and the cost of increasing insulation in the home. However, you cannot include the installation costs for this equipment in the credit.
Energy Efficient Home Improvement credit for 2023 through 2032
Beginning in 2023 the credit for the costs of installing certain energy-efficient upgrades increases from 10% to 30%. In addition to covering insulation, windows, doors, and roofing included in the existing credit, the new version also covers certain types of stoves, boilers, electric panels, and other related equipment. The spending limits have also increased to $1,200 per year vs. the previous $500 lifetime limit. This means that you could qualify for up to $12,000 of this tax credit over its ten year life from 2022 through 2032.
The annual limits on the credit for specific types of qualifying home improvements include:
- 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)
Residential Clean Energy credit
In addition to the credits mentioned above, you can also claim the Residential Clean Energy (RCE) credit when you acquire certain qualified alternative energy equipment for use in the home. The RCE credit replaces the Residential Energy Efficient Property (REEP) credit beginning with the 2022 tax year. The allowable credit is up to 30 percent of an unlimited amount of costs you incur to purchase and install qualified energy property including:
- solar electric
- solar water heating
- fuel cell property
- small wind energy
- geothermal heat pump property
Additionally, beginning in 2023, battery storage technology expenditures will be covered by the same credit. However, the fuel cell property credit has its own limit of $500 for each 0.5 kilowatt (kw) of capacity.
The RCE credit provides for a credit of up to 30% (except for fuel cell property mentioned above) of the cost of qualified equipment and installation for tax years 2022 through 2032. The credit then steps down to 26% for 2033, 22% for 2034, after which it will no longer be available.
The majority of the RCE credit is available for the improvements you make to any of your residences, whether it’s your principal residence or vacation home. However, to claim any of the non-business energy property credits or the RCE's fuel cell credit, the improvements must be made to your principal residence.
Your principal residence is where you live for most of the time during the tax year and can include houses, houseboats, cooperative apartments, condominiums and even mobile homes. If you own more than one home and spend a significant amount of time at each, you may count one of them as your principal residence for the improvements you make during the tax year.
Tax basis adjustments
The tax basis of your home is essentially the price you paid for it or the cost to construct it. The amount that you spend on the energy improvements will typically increase your tax basis. However, claiming either of the tax credits requires you to reduce the tax basis by an amount equal to the total of the credits that you claim. So, if you spend $10,000 for a qualifying solar electric power system and receive a 30% credit totaling $3,000, your cost basis of you home will increase by $7,000 ($10,000 expenditure - $3,000 tax credit = $7,000 increase in tax basis).
Lowering your basis can have the effect of increasing the gain (or reducing the loss) you’ll have to report when you sell the home. However, since the tax law provides for an exclusion of up to $250,000 of gain from the sale of a home (or $500,000 for couples filing jointly), the basis reduction might not have any adverse tax consequences for you. Regardless of the outcome, it’s a good idea to retain a copy of your Form 5695.
Applying the credit to your tax return
If you meet the requirement of these tax credits, you typically can claim them on your tax return subject to certain limitations. These tax credits directly reduce your tax. 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. However, these 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 use them to reduce your future tax liability.
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