Energy Efficient Home Improvement Credit

By snapme | January 21, 2025 |

Tax Tip 1 – Energy Efficient Home Improvement Credit

The Inflation Reduction Act of 2022 amended the credits available for energy efficient home improvements and residential clean energy property. Here are some tips to help you determine if you’re eligible for the energy efficient home improvement credit.

For property that is ready for use (also referred to as placed in service) from 2023-2032, this credit is available for energy efficient home improvements. It is a nonrefundable credit that can reduce or eliminate the amount of tax you owe. The credit cannot be refunded.

The energy efficient home improvement credit has a yearly combined limitation of $3,200: $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, biomass stoves, and biomass boilers, and $1,200 for the other qualifying improvements. There is no lifetime limitation.

Note: Your cost in calculating energy efficient home improvements is generally reduced by any public utility subsidies and product rebates you receive. However, your cost is generally not reduced by state energy-efficiency incentives.

Qualifying Improvements

The cost of qualified energy efficiency improvements, residential energy property expenditures, and home energy audits potentially qualify for the energy efficient home improvement credit.

Qualified Energy Efficiency Improvements

Qualified energy efficiency improvements must meet certain criteria based on building components (referred to as building envelope components) used to make a building energy efficient. The criteria requires that building components:

Are installed in or on a dwelling unit in the United States that is owned and used by the taxpayer as the taxpayer’s principal residence;

Are placed into service (initially used) by the taxpayer making the improvement;

Are reasonably expected to remain in use for five years; and

Meet the energy efficiency requirements.

Energy efficient building envelope components are:

Any insulation materials or systems, including air sealing materials or systems, which are specifically and primarily designed to reduce heat loss or gain of a dwelling unit when installed in or on such dwelling unit

30 percent of the cost of these materials or systems are eligible for the credit.

The materials or systems must meet criteria established by the most recent International Energy Conservation Code standard in effect at the start of the year that is two years prior to the year the materials or systems are placed in service.

Exterior windows, including skylights

30 percent of the cost of windows or skylights, up to $600, is eligible for the credit.

The windows or skylights must meet Energy Star Most Efficient certification requirements.

Exterior doors

30 percent of the cost of exterior doors, up to $250 per door, is eligible for the credit.

The credit for exterior doors is limited to $500 annually.

The doors must meet applicable Energy Star requirements.

Residential energy property expenditures

Residential energy property expenditures are expenditures, including labor costs, for qualified energy property that:

Is installed on or in connection with a dwelling unit in the United States that is used as a residence by the taxpayer;

Is placed into service (initially used) by the taxpayer making the expenditure; and

Meets the energy efficiency requirements.

Qualified energy property is:

Electric or natural gas heat pump water heater

30 percent of the cost of an electric or gas heat pump water heater, up to $2,000, is eligible for the credit.

The water heater must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency, which is in effect as of the beginning of the calendar year in which the property is placed in service.

Electric or natural gas heat pump

30 percent of the cost of an electric or natural gas heat pump, up to $2,000, is eligible for the credit.

The heat pump must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency, which is in effect as of the beginning of the calendar year in which the property is placed in service.

Central air conditioner

30 percent of the cost of a central air conditioner, up to $600, is eligible for the credit.

The air conditioner must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency, which is in effect as of the beginning of the calendar year in which the property is placed in service.

Natural gas, propane, or oil water heater

30 percent of the cost of a natural gas, propane, or oil water heater, up to $600, is eligible for the credit.

The heater must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency, which is in effect as of the beginning of the calendar year in which the property is placed in service.

Natural gas, propane, or oil furnace or hot water boiler

30 percent of the cost of a natural gas, propane, or oil furnace or hot water boiler, up to $600, is eligible for the credit.

The boiler must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency, which is in effect as of the beginning of the calendar year in which the property is placed in service.

Biomass stove or boiler

30 percent of the cost of a biomass stove or boiler, up to $2,000, is eligible for the credit.

The stove or boiler must have a thermal efficiency rating of at least 75 percent (measured by the higher heating value of the fuel).

Oil furnace or hot water boiler

30 percent of the cost of a furnace or hot water boiler, up to $600, is eligible for the credit.

The boiler must meet or exceed 2021 Energy Star efficiency criteria and is rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of an eligible fuel.

Qualified improvement to, or replacement of, a panel board, sub-panelboard, branch circuits, or feeders

30 percent of the cost of the qualified improvements, up to $600, is eligible for credit.

These improvements must be installed according to the National Electric Code, have a load capacity of 200 amps or greater, be installed in conjunction with any qualified energy property, and enable the installation and use of the qualified property.

Home Energy Audits

A home energy audit is an inspection and written report for a dwelling unit in the United States that is owned or used by the taxpayer as the taxpayer’s principal residence. The inspection and written report must identify the most significant and cost-effective energy efficiency improvements for the dwelling unit, including an estimate of the energy and cost savings for each improvement. A certified home auditor must conduct the audit. The credit is 30 percent of the cost, capped at $150.

Didn’t find what you were looking for? See our Tax Tip on the Residential Clean Energy Property Credit.

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