Claiming an energy tax credit 2024-2025

Making energy efficient updates to your home is a great move for our environment. But you might feel the pinch in your household budget. The good news is that there are a couple of energy tax credits that can help out your pocketbook.

You may qualify for an energy tax credit if you made renewable energy upgrades or boosted the energy efficiency of your home through improvements like solar or geothermal equipment. Energy tax credits are government-offered tax incentives meant to encourage taxpayers to use alternative energy resources. The credit is applied to your income tax liability, reducing what you owe dollar-for-dollar. The credits offer energy savings by offsetting the costs of energy-saving improvements like solar panels, insulation, windows and doors, and other sources of renewable energy.

Energy tax credits: Updates to tax rules

In August 2022, the Inflation Reduction Act amended two credits for energy efficient home improvements and clean energy equipment. The legislation renamed and extended the tax incentives, which now have a greater financial impact.

In this post, we’ll cover two credits:

1. Energy Efficient Home Improvement Credit (previously the Nonbusiness Energy Property Credit)
2. Residential Clean Energy Credit (previously the Residential Energy Efficient Property Credit)

1. Energy Efficient Home Improvement Credit

With the Inflation Reduction Act of 2022, the Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit.

It’s important to note that the credit will follow different rules depending on the year the improvement is installed. Read on for details.

Property placed in service in tax year 2022 or earlier

For improvements installed prior to 2023, the Nonbusiness Energy Tax Credit is available for energy efficient home improvements that include building envelope components and energy properties (energy efficient home improvements that increase the heating and cooling efficiency of your primary residence).

This energy tax credit is available for energy efficient home improvements that fall into the following categories:

Building envelope

Eligible items are:

• Insulation material or systems
• Exterior windows, skylights, or doors
• Storm windows and storm doors installed over certain types of windows and doors
• Certain metal roofs
• Certain asphalt roofs

Energy properties

These are home appliances that improve the home’s heating and cooling efficiency. Improvements include:

• Advanced main air-circulating fan used in a natural gas, propane, or oil furnace
• Biomass fuel stoves
• Central air conditioners
• Electric heat pump water heaters
• Electric heat pumps
• Natural gas, propane, or oil furnaces
• Natural gas, propane, or oil water boilers
• Natural gas, propane, or oil water heaters

The maximum lifetime credit amount for all types of property combined is $500 for tax year 2022 and all prior years. No more than $200 can be claimed for exterior windows. The property must be original use property installed in your main home in the United States.

The Nonbusiness Energy Tax Credit can be claimed on your 2022 tax return via Form 5695 if you file an amended tax return within three years of the date you filed the original return or within two years of the date you paid tax for that year (whichever is later). Also, when you claim the credit, make sure to reference the manufacturer’s certification statements as to whether the purchase qualifies!

Tax years 2023 to 2032: What to know about the Energy Efficient Home Improvement Credit for 2024 and beyond

The new credit increases from 10% to 30% of qualified energy-efficient improvements and residential property expenses. It also removes the $500-per-person lifetime credit limit, giving you, the taxpayer, a maximum credit limit of $1,200 per year. The limit per qualifying item is generally $600 ($250 per exterior door up to $500 for all exterior doors). Additionally, heat pumps, heat pump water heaters, biomass stoves, and biomass boilers have a separate annual credit limit of $2,000 with no lifetime limitation.

The new provision also made the following changes:

• Roofs no longer qualify, but air sealing insulation does.
• You can claim the credit for not only a primary residence, but also a secondary one.
• Beginning in 2025, you should include the product ID on tax forms to claim the credit. And taxpayers can also claim Home Energy Audit Tax Credit for 30% of costs up to $150. The credit is still claimable on Form 5695.

Note that unused Energy Efficient Home Improvement Credit amounts can’t be applied to a future year’s tax return.

2. Residential Clean Energy Credit

The same legislation mentioned above renamed the Residential Energy Efficient Property (REEP) credit to the Residential Clean Energy Credit in 2022. The rules below apply to property put in service after Dec. 31, 2021, through December 31, 2034.

However, the value of this clean energy tax credit changes depending on when you’ve installed the property.

The credit rates are:

• 26% for property placed in service during 2021
• 30% for property placed in service from 2022-2032
• 26% for property placed in service during 2033
• 22% for property placed in service during 2034

What property qualifies?

New solar electric, wind, and other alternative energy equipment installed in your home may qualify. But, wait… If your home also has solar panels, there are even more credits you could potentially claim. Learn more about claiming solar credits. The credit is nonrefundable, but if you have unused Residential Clean Energy Credit amounts that you didn’t claim on your current year’s tax return, you are able to roll those forward to future years to offset your tax liability.

File Form 5695 (Residential Energy Credits) with your tax return to claim the Residential Clean Energy Credit.

Other ways to save

• Clean vehicle tax credit: As part of the Inflation Reduction Act, electric vehicle and fuel cell vehicle owners may qualify for an EV tax credit of up to $7,500.
• Rebate programs: As well as the federal tax credit options discussed above, you may want to look into a rebate program for energy efficient purchases. The Inflation Reduction Act appropriated funds for the Home Electrification and Appliances Rebate (HEAR) Program and the Home Efficiency Rebates (HOMES) Program to help low- and middle-income families. Many appliances, electronics, heating and cooling equipment, water heaters, and building products also come with rebates through local utility companies.

Get help claiming federal energy tax credits

Claiming energy tax credits can be complex, but we’re here to help! Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to navigate tax deductions and credits.