UPDATED Expanded Tax Credits Help Offset the Costs of Energy-Efficient Home Improvements by Maxwell Jewell, CPA, MST
Posted on January 30, 2024
by
Maxwell Jewell
Upgrading your home’s energy efficiency can not only help the environment and reduce your electric bills, but it can also provide you with valuable tax credits to cover a portion of qualifying improvement expenses beginning in 2023.
Energy Efficient Home Improvement Credits
Under the Inflation Reduction Act signed into law in 2022, homeowners may earn up to $3,200 in Energy Efficient Home Improvement Credits each year through 2032 for energy-efficient improvements they make to an existing primary residence. This includes as much as $1,200 in tax credits for energy-efficient improvements to a home’s envelope, central air conditioning system, furnace and boiler, and up to $2,000 per year for the installation of qualifying heat pumps, water heaters, biomass stoves and biomass boilers.
The credit, which may not be applied to new construction homes or rental property, is equal to 30 percent of the total cost homeowners incur each year when they install a broad range of upgrades after Jan. 1, 2023, and before Jan. 1, 2033, including:
- electric or natural gas heat pumps, water heaters and central air conditioners;
- exterior windows and doors
- home backup power battery storage;
- insulation materials and systems that meet International Energy Conservation Code standards;
- natural gas or propane water heaters, furnaces and boilers;
- oil furnaces or hot water boilers that meet or exceed 2021 Energy Star efficiency criteria and are rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel;
- panelboards, sub-panelboards, branch circuits, or feeders that are installed according to National Electrical Code and have a load capacity of 200 amps or more (maximum credit $600);
- solar panels for electricity; and
- solar water heating products certified by the Solar Rating Certification Corporation or comparable entity.
It is important to note that the credit is non-refundable; homeowners may use it to decrease or eliminate their tax liabilities. Moreover, the credit has no lifetime dollar limit, meaning you can claim the maximum credit every year you make eligible improvements to your home through 2033. However, there are limits to the dollar amount you may claim as credits for specific upgrades. For example, the maximum credit for installing energy-efficient windows is restricted to $600 or less, whereas the credit for an electric or natural gas heat pump maxes out at $2,000 per year.
The law also provides a tax credit of up to $150 to homeowners who engage qualified energy auditors in 2024 or later to inspect and provide a written report detailing the most significant and cost-effective energy efficiency improvements they can make to their homes.
Residential Clean Energy Credit
The law also provides a Residential Clean Energy Credit equal to 30 percent of new, qualified clean-energy property improvement they make to a new or existing home, including a second home they do not rent to others. Qualifying costs include those for generating solar, wind and geothermal power, burning plant-derived biomass fuel to heat a dwelling or installing fuel cell property that uses electrochemical means to convert fuel into electricity. When calculating the amount of the credit, you may need to subtract subsidies, rebates or other financial incentives from manufacturers or public utilities since they are considered a purchase-price adjustment.
About the Author: Maxwell Jewell, CPA, MST, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors & CPAs, where he provides tax and consulting services to high-net-worth families and businesses in the private equity and software sectors. He can be reached at the CPA firm’s New York City office at (646) 213-7600 or info@bpbcpa.com.
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