If your home-renovation project includes the installation of energy-efficient equipment, a tax credit may be available to you.
Credits for renovating your home
Renovating your home can be an expensive endeavor, especially since you can't claim a federal tax deduction to defray the costs. However, if your home-renovation projects include the installation of qualified energy-generating equipment, then you may get some relief by claiming a tax credit.
Even if you don't qualify for a credit, at least you can reduce your taxable gain when you sell the home by the cost of the renovations. Remember to file away and keep all receipts.
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.
Nonbusiness Energy Property credit through 2022
Available through 2022, this credit 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)
Alternative energy-producing renovations
The Residential Energy Efficient Property (REEP) credit was introduced to stimulate investment in alternative energy equipment, allowing you to include an unlimited amount of costs when calculating the credit. You can claim the credit for renovations you make to any home you own that you use for personal purposes, and even ones under construction.
Beginning in 2022, the has been enhanced and renamed the Residential Clean Energy (RCE) credit. The RCE credit replaces the REEP credit and runs through 2032 at its full amount with reduced amounts in 2033 and 2034.
When calculating the credit, include a percentage of the purchase price and the cost of labor for installation. Equipment that qualifies for the credit includes:
- solar-electric panels
- solar hot water heaters
- geothermal heat pumps
- small wind turbines
- fuel cells ($500 for each 0.5 kilowatt (kw) of capacity)
Claiming the credits
When you are ready to prepare your tax return, complete and attach IRS Form 5695 to claim the credit. Since these are all nonrefundable credits, their maximum savings is limited to the amount of tax you actually owe for the year.
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