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Energy Tax Credit: Which Home Improvements Qualify?

Updated for Tax Year 2014


OVERVIEW

Taxpayers who upgrade their homes to improve energy efficiency or make use of renewable energy may be eligible for tax credits to offset some of the costs. As of the 2014 tax year, the federal government offers two such credits: the Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit. The first credit is good through 2016; the second was due to expire after 2014 (although it has been extended in the past). Claim either credit by filing Form 5695 with your tax return.


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Residential Energy Efficiency Property Tax Credit

energy tax credits for the home

Equipment that qualifies for the Residential Energy Efficiency Property Credit includes solar, wind, geothermal and fuel-cell technology: 

  • Solar panels, or photovoltaics, for generating electricity. The electricity must be used in the home.
  • Solar-powered water heaters. The water heated by the system must be used inside the home, and at least half of the home's water-heating capacity must be solar. (Solar heaters for swimming pools and hot tubs do not qualify.)
  • Wind turbines that generate up to 100 kilowatts of electricity for residential use. 
  • 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. The equipment must generate at least 0.5 kilowatts of power.

Renewable energy tax credit details

According to the U.S. Department of Energy, you can claim the Residential Energy Efficiency Property Credit for solar, wind and geothermal equipment in both your principal residence and a second home. But fuel-cell equipment qualifies only if installed in your principal residence. 

The credit is equal to 30% of the cost, including installation. There is no upper limit on the amount of the credit for solar, wind and geothermal equipment, but the maximum tax credit for fuel cells is $500 for each half-kilowatt of power capacity, or $1000 for each kilowatt.
 
For example, a fuel cell with a 5 kW capacity would qualify for 5 x $1000 = $5000 tax credit.

Nonbusiness Energy Property Tax Credit

Equipment and materials can qualify for the Nonbusiness Energy Property Credit only if they meet technical efficiency standards set by the Department of Energy. The manufacturer can tell you whether a particular item meets those standards. For this credit, the IRS distinguishes between two kinds of upgrades.

The first is "qualified energy efficiency improvements," and it includes the following: 
  • Home insulation 
  • Exterior doors
  • Exterior windows and skylights 
  • Certain roofing materials
The second category is "residential energy property costs." It includes: 
  • Electric heat pumps
  • Electric heat pump water heaters
  • Central air conditioning systems 
  • Natural gas, propane or oil water heaters 
  • Stoves that use biomass fuel
  • Natural gas, propane or oil furnaces 
  • Natural gas, propane or oil hot water boilers
  • Advanced circulating fans for natural gas, propane or oil furnaces

Details of Nonbusiness Tax Credit

You can claim a tax credit for 10% of the cost of qualified energy efficiency improvements and 100% of residential energy property costs. However, significant limits apply: 

  • This credit is worth a maximum of $500 for all years combined, from 2006 to the present. 
  • Of that combined $500 limit, a maximum of $200 can be for windows. 
  • The maximum tax credit for a furnace circulating fan is $50. 
  • The maximum credit for a furnace or boiler is $150. 
  • The maximum credit for any other single residential energy property cost is $300.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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