Clean energy credits for individual taxpayers

Individuals looking to make energy efficient home improvements should consider reviewing some of the taxpayer-friendly benefits offered in last year’s Inflation Reduction Act of 2022 (IRA). Below is a summary of select items to consider when evaluating home improvement needs as well as gathering data while preparing 2023 tax returns.

This article will examine two credits available for improvements made to taxpayer residences. These provisions do not apply to residences held for use in a trade or business. Instead, these credits can be claimed regarding homes used as a residence (sometimes only a principal residence) of the taxpayer. Since this discussion does not detail all of the IRA benefits available to individuals (and does not cover provisions applicable to businesses), we encourage you to visit our IRA resource center for more information.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit (EEHIC) applies to the qualifying expenditures made by an individual during the tax year for the following:

1. Installment of qualified energy efficiency improvements,
2. Residential energy property, and
3. Home energy audits.

The EEHIC equals 30% of qualifying expenditures with additional limitations based on the type of expenditure. The credit for exterior doors is limited to $250 per door, up to a total of $500 per year. The credit for exterior windows and skylights is limited to $600 per year. Home energy audits are limited to an annual amount of $150. Excluding certain expenditures, the overall limit on the EEHIC per year is $1,200. Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers have an annual credit limit of $2,000. This $2,000 annual limit is applied separately from the other limitations.

There are certain energy efficiency standards that some property must satisfy in order to be eligible for the credit. For example, exterior doors must meet applicable Energy Star requirements, windows and skylights must meet the Energy Star most efficient certification requirements. Additional efficiency standards apply to other types of property.

The EEHIC is not available for improvements made to a home that is not used as a residence. The credit can only be claimed on qualified energy improvements made, and home energy audits conducted, with respect to the taxpayer’s principal residence.

The EEHIC is only available for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home and not for a newly constructed home. The home must be located in the United States.

The EEHIC may not be carried forward and is nonrefundable. Thus, if a taxpayer does not have sufficient tax liability to claim all or a portion of the credit in the year in which the related property is placed in service, the unused amount of the credit is permanently lost.

Residential Clean Energy Property Credit

The Residential Clean Energy Property Credit (RCEPC) applies to the following types of property:

1. Solar electric property expenditures (solar panels);
2. Solar water heating property expenditures (solar water heaters);
3. Fuel cell property expenditures;
4. Small wind energy property expenditures (wind turbines);
5. Geothermal heat pump property expenditures; and
6. Battery storage technology expenditures.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.