Upgrading your home with energy efficient additions and improvements could be a great way to help the environment and save money on taxes.
- Are home improvements tax deductible?
- Which energy-related home improvements are tax-deductible?
- What is the Energy Efficient Home Improvement Credit?
- 1. Replacing your windows
- 2. Putting in a skylight
- 3. Replacing your gas furnace with an electric heat pump
- 4. Bringing in new energy-efficient appliances
- 5. Adding insulation
- 6. Buying new doors
- What is the Residential Clean Energy Credit?
- 7. Going solar or adding residential wind turbines
- 8. Adding fuel cell or geothermal heat pump technology
- 9. Installing energy storage technology
- What is the Alternative Fuel Refueling Property Tax Credit?
- 10. Installing electric vehicle charging equipment
• The Residential Clean Energy Credit is designed to reduce the cost of installing clean energy technology on your home, including solar, wind, geothermal and fuel-cell technology.
• The Energy Efficient Home Improvement Credit offers tax benefits for installing qualifying equipment, making certain home improvements or undergoing energy audits.
• The Alternative Fuel Refueling Property Credit offers tax credits for installing qualifying alternative fuel charging or refueling equipment in your home.
• New rules for these credits came from passage of the Inflation Reduction Act of 2022.
Are home improvements tax deductible?
Generally speaking, making improvements to your home won’t qualify you for a tax deduction. However, some exceptions can apply. One such example includes making an investment in medically necessary wheelchair ramps or lifts to your home and claiming your expenses with the medical expense deduction.
Another option is energy-related home improvements. These upgrades qualify for tax credits. And that’s better for you since tax credits provide more impact on a dollar-for-dollar basis than would equivalent tax deductions.
Which energy-related home improvements are tax-deductible?
As stated above, there aren’t any energy-related home improvements that qualify for tax deductions. Instead, there are several helpful energy-focused tax credits that can bring down the cost of investing in new appliances, windows, doors, electric vehicle charging equipment, and more. The government offers these incentives to make going green more affordable.
In August 2022, the Inflation Reduction Act amended three such credits made available for three categories of investments: making energy-efficient home improvements, installing residential clean energy equipment or electric vehicle charging equipment. The law changed the rules for these tax credits so that they last longer and have a greater financial impact.
We first cover the associated credit for each group of home improvements at a high-level and then discuss some of the most impactful options to claim them below.
What is the Energy Efficient Home Improvement Credit?
The Nonbusiness Energy Property Credit expired at the end of 2022 and only amounted to $500 in total lifetime credit value. This changed after the passage of the Inflation Reduction Act, which extended the credit from January 1, 2023 through December 31, 2032, expanded it to be worth up to $1,200 per year for qualifying property placed in service on or after January 1, 2023, and changed the credit’s name to the Energy Efficient Home Improvement Credit.
Because the new credit has an annual limit rather than a lifetime limit, if you can manage to spread out your qualifying home improvements over the 10-year life of the credit, you could receive up to $12,000 back on your taxes as compared to only $500 allowed under the previous credit. You can also receive up to an additional $2,000 per year for making qualified investments in heat pumps and biomass stoves and boilers.
1. Replacing your windows
Replacing your windows with more energy-efficient models can be beneficial for both the environment and your bank account. Not only can it help reduce the amount of heat that’s exchanged between the inside and outside your home, it can help with lowering your greenhouse gas emissions and your heating and cooling costs—not to mention your tax bill.
Beginning January 1, 2023, the Energy Efficient Home Improvement Credit becomes equal to the lesser of 30% of the sum of amounts paid for qualifying home improvements or the annual $1,200 credit limit. In addition to the aggregate $1,200 limit, annual dollar credit limits apply to specific items including external windows worth up to an additional $600 per year.
To qualify, your new windows must meet the most efficient Energy Star certification requirements.
2. Putting in a skylight
Like replacing your windows, you can potentially save money by adding a skylight to your home. To claim the Energy Efficient Home Improvement Credit on your tax return, the new skylight must meet the Energy Star Most Efficient criteria. You can receive the lesser of 30% of the project cost of $600.
TurboTax Tip: Because the new Energy Efficient Home Improvement Credit offers annual aggregate limits instead of a one-off credit, it may be a good idea to try spreading out your improvements over a few years. That way, it can maximize your savings over time.
3. Replacing your gas furnace with an electric heat pump
Heat pumps provide a more efficient way of heating and cooling a home compared to gas furnaces. Heat pumps work by transferring heat rather than generating it, meaning they require less energy to operate. This reduces your energy consumption and helps reduce emissions, making it an environmentally friendly way to keep your home warm. You can receive up to an additional $2,000 per year for making qualified investments in heat pumps.
To qualify for this credit, you can install electric or natural gas heat pumps that meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency (CEE) that is in effect as of the beginning of the year in which the property is placed in service. To understand if the heat pump you’re considering installing qualifies for the credit and efficiency tier requirements, you can access the CEE Directory of Efficient Equipment for a searchable database of qualifying equipment.
4. Bringing in new energy-efficient appliances
Like installing a heat pump, the new Energy Efficient Home Improvement Credit offers incentives for placing new energy-efficient appliances in your home. Much like replacing your furnace with an electric heat pump, certain energy-efficient appliance and electrical equipment upgrades qualify for the Energy Efficient Home Improvement credit. Specifically:
- central A/C units
- electric panels and related equipment
- natural gas, propane and oil water heaters, furnaces or hot water boilers
To qualify, you’ll need to meet minimum energy efficiency standards.
5. Adding insulation
By replacing insulation you might qualify for the Energy Efficient Home Improvement credit. Subject to the lesser of 30% of the project cost or $1,200 per year, if you install insulation that reduces the loss of hot or cold air from your home, it could save you money on your taxes.
Typical bulk insulation products can qualify, such as batts, rolls, blow-in fibers, rigid boards, expanding spray, and pour-in-place. Further, any products that air seal or reduce air leaks can also qualify, as long as they come with a Manufacturer's Certification Statement, including the following items:
- Weather stripping
- Spray foam in a can, designed to air seal
- Caulk designed to air seal
- House wrap
6. Buying new doors
If you’ve got some old exterior doors that leak air, you might consider upgrading to a new door with tax savings courtesy of the Energy Efficient Home Improvement Credit. Each year, you may upgrade two doors and receive a credit worth up to $250 per door, or $500 per year.
To qualify, your new exterior doors must be Energy Star certified. Further, the new exterior doors must be installed on your existing home used as your principal residence (new construction and rentals don't apply).
TurboTax Tip: The IRS considers a domestic principal residence as the home where you live most of the time and which is in the United States. It can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home.
What is the Residential Clean Energy Credit?
Another renamed credit after passage of the Inflation Reduction Act, the Residential Clean Energy Credit is a renewable energy tax credit that was also extended and expanded. The credit, worth 30% of certain qualified expenses for residential clean energy property, has been extended through 2034 and had the applicable credit percentage rates modified. Further, the new credit has added battery storage technology as an eligible expenditure.
The credit applies for property placed in service after December 31, 2021, and before January 1, 2033. Starting in 2033, the credit percentage rate phases down to 26% for 2033, then to 22% for 2034, and finally to no credit being available after December 31, 2034.
7. Going solar or adding residential wind turbines
When you purchase solar equipment or certain wind turbines for your home and have tax liability, you generally can claim the Residential Clean Energy Credit to lower your tax bill. This non-refundable credit can offset your income tax liability on a dollar-for-dollar basis (meaning you need tax liability to claim this credit), but any excess credit won’t be refunded. In the event the credit you qualify for exceeds your tax liability for the year, you can “roll over” the unused portion to future years so long as the credit remains in effect.
Qualifying equipment for this credit includes solar, wind, and other technologies (covered later), with the following renewable energy generation technologies included:
- Solar panels, or photovoltaics, for generating electricity
- Solar-powered water heaters for water used inside the home (at least half of the home's water-heating capacity must be solar and water for swimming pools and hot tubs doesn't qualify)
- Wind turbines that generate up to 100 kilowatts of electricity for residential use
Often, solar experts recommend only installing rooftop solar panels on new or newer roofs. Doing so reduces the chance of needing to replace the roof due to wear and tear during the solar panel system’s lifetime. If you replace your roof just prior to installing the rooftop solar panel system, you can’t claim any costs associated with the roof replacement for this credit. Those costs wouldn’t qualify for the Residential Clean Energy Credit.
8. Adding fuel cell or geothermal heat pump technology
In addition to solar and wind power technology, you can generally claim the Residential Clean Energy Credit on fuel cell and geothermal heat pump technology so long as they meet certain requirements.
- Geothermal heat pumps that meet federal Energy Star guidelines
- Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home (minimum 0.5 kilowatts of power generation capacity)
9. Installing energy storage technology
As another form of energy-related technology qualifying for the Residential Clean Energy Credit, you can also install battery storage technologies on your home. You can claim the credit on solar power storage equipment for tax year 2022 of any capacity. But from 2023 through 2034, when the credit expires, you’ll need to make sure your energy storage technology has a capacity of at least 3 kilowatt-hours (kWh).
What is the Alternative Fuel Refueling Property Tax Credit?
The federal tax credit offered for installing electric vehicle charging equipment expired at the end of 2021. The Inflation Reduction Act of 2022 reinstated the credit for ten years through December 31, 2032. The tax credit now also applies to new EV charging equipment like bidirectional chargers as well. The tax credit is worth up to 30% of the cost of hardware and installation up to $1,000.
10. Installing electric vehicle charging equipment
After initially expiring before passage of the Inflation Reduction Act, the Alternative Fuel Refueling Property Credit is back and better than ever through December 31, 2032. Worth up to 30% of the cost of hardware and installation, up to $1,000, this credit applies to home and business installations and also to new bidirectional charging equipment.
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