Home Energy Tax Credits and Rebates That Can Reduce the Costs of Home Ownership

Residential energy credits aren’t just for big projects like solar panels. That said, the credits for more common upgrades such as doors, windows, and insulation have been rather limited. There was a lifetime limit of $500 for those items. But great news for homeowners: the Inflation Reduction Act changes that starting in 2023.

Residential Energy Credits 2022

There are two categories of credits: 

1. The first is qualified clean energy credit. This credit was renamed to the residential clean energy credit. Items like solar panels, fuel cells, solar hot water systems, geothermal, and wind systems are covered under this category. Any systems purchased and installed Jan. 1, 2022 through 2032 qualify for a 30% tax credit. If you aren’t able to use all of the credit to reduce your tax liability, it can be carried over to 2023. 

2. The second category is nonbusiness energy property credit. This credit has a lifetime limit of $500. The good thing is it applies to more common energy efficient improvements and energy property expenditures, including items such as insulation, certain metal roofing, exterior windows, and exterior doors. Qualified energy property includes items like heat pumps, heat pump water heaters, and HVAC systems. The rules vary between the different items. Some items have limits below the $500. Also, the items qualifying for this credit are typically required to have certain efficiency or energy ratings. You can find the details on this credit in Publication 5695.

Residential Energy Credits 2023 (and after)

For 2023, the residential clean energy credit no longer includes biomass systems; however, battery storage systems now qualify. Those changes are important but not as significant as the changes for the nonbusiness energy credit.

The Energy Efficient Home Energy Credit

The nonbusiness energy credit becomes the energy-efficient home energy credit starting in tax year 2023. More importantly, the credit is now worth 30% of expenditures but with an annual limit. The lifetime limit is gone. 

• The limit for improvements like energy-efficient insulation and exterior doors and windows will be an annual limit of $1200. There are varying limits for the different upgrades and items covered under this credit. 
• There is a limit of $2000 for property improvements like heat pumps, heat pump water heaters, and biomass systems and boilers. The max annual credit limit for a central air conditioner is $600.
• The max annual credit limit for exterior windows is also $600. 
• The max annual limit for an exterior door is $250, with a total annual limit for doors of $500. 
• There is also a $150 credit permitted for a home energy audit. 

The improvements or replacements generally have to meet certain efficiency or energy standards. Overall, there are more items and improvements covered under the credit change in 2023 and going forward. The IRS doesn’t yet have a publication that covers this new credit well. The text of the law could be referenced as well as this IRS notice. 

Rebates for low to moderate-income households

The High Efficiency Electric Home Rebate Act (HEEHRA) was passed as part of the Inflation Reduction Act. It goes into effect in 2023. If a household has less than 80% of the Area Median Income (AMI), the household may qualify for 100% rebates. If a household has 80-150% of AMI, they may qualify for 50% rebates. 

These rebates are for use in a primary residence for improving energy efficiency and may include wiring and appliances as well as many of the improvements covered by the tax credits mentioned above. You won’t be able to double dip, using the tax credit and the rebate for the same expenditures.

That is the good news. The bad news is that the federal government is still writing the rules on how this program will work and how the money will be distributed. If possible, low to moderate-income homeowners may want to delay any needed energy improvements until this program is fully rolled out and more information is available. In some cases, this may be thousands of dollars of rebates, so it may be worth the wait.

Final Tax Tip

Don’t go out and spend money on home improvements just because you may get credits or rebates. Do your research and the math to make sure the investment makes sense for you.