The IRS has updated its guidelines on the Energy Efficient Home Improvement Credit, reflecting changes from the Inflation Reduction Act of 2022. These updates clarify eligible expenditures, which include energy-efficient improvements like exterior doors, windows, and insulation, and residential energy properties such as heat pumps and water heaters. Optima Tax Relief answers frequently asked questions regarding energy-efficient tax credits.
What home improvements are eligible for the credit, and how much is the credit?
The Energy Efficient Home Improvement Credit offers tax benefits for qualifying energy-efficient upgrades, divided into three categories. For “qualified energy efficiency improvements,” up to 30% of costs can be credited, with caps for exterior doors ($500 total), windows/skylights ($600), and insulation/air sealing ($1,200). “Residential energy property expenditures” also receive 30% credit, with a $600 cap for items like central air conditioners, furnaces, and water heaters, but no cap for heat pump water heaters, heat pumps, and biomass stoves.
Is there a limit on the total amount of the credit that a taxpayer can claim?
The Energy Efficient Home Improvement Credit is typically limited to $1,200 per taxpayer per year, with specific caps for different improvements. For example, exterior doors are capped at $500, windows/skylights at $600, and residential energy property at $600 per item. However, certain properties like heat pump water heaters, heat pumps, and biomass stoves have a higher $2,000 annual limit. If a taxpayer qualifies for both categories, they could potentially claim up to $3,200 in credits.
Can taxpayers claim the credit for the qualified property they install themselves?
Yes, taxpayers can claim the Energy Efficient Home Improvement Credit for qualified properties they install themselves.
Are expenditures for window treatments, such as blinds, shutters, or tinting, eligible for the credit?
Window treatments like blinds, shutters, or tinting are not eligible for the Energy Efficient Home Improvement Credit.
What energy efficiency requirements must be met to qualify for the Energy Efficient Home Improvement Credit?
To qualify for the Energy Efficient Home Improvement Credit, certain properties must meet specific energy efficiency standards. Exterior windows and skylights must meet Energy Star’s most efficient certification, while exterior doors must meet Energy Star requirements. Insulation and air sealing materials must comply with the International Energy Conservation Code (IECC). Additionally, heat pumps, water heaters, furnaces, and biomass stoves must meet or exceed efficiency standards set by relevant authorities like the Consortium for Energy Efficiency (CEE) or Energy Star.
What type of residence is required for the Energy Efficient Home Improvement Credit?
To qualify for the credit, the property must be installed in a home located in the U.S. and used as the taxpayer’s principal residence. Taxpayers cannot claim the credit for properties installed in rental homes or second homes for certain improvements like windows, doors, or insulation. However, they can claim it for certain equipment like heat pumps or water heaters, even in rental or second homes. Home energy audits must be performed on a taxpayer’s principal residence, but the credit can apply to rented properties.
Can a taxpayer claim the credit if the property is also used for business purposes?
A taxpayer may claim the credit for property used in a business if it is not more than 20% of the total use. If the business use exceeds 20%, the taxpayer must calculate the credit based on the portion of the property used for nonbusiness purposes. If the property is used solely for business, it does not qualify for the credit.
Can a taxpayer include labor costs when calculating the credit?
A taxpayer can include labor costs for certain residential energy property expenditures, such as the installation of electric or natural gas heat pump water heaters, air conditioners, and similar systems. However, labor costs cannot be included for energy efficiency improvements like exterior windows, skylights, doors, or insulation materials. These distinctions help clarify what qualifies for the credit based on the type of energy-related improvement.
Example Scenario: Energy-Efficient Home Improvement Credit
A taxpayer can claim 30% of qualifying costs for energy-efficient improvements, but credit amounts are limited by per-item and overall caps. For example, a taxpayer installs two doors at $1,000 each, windows/skylights at $2,200, and a central air conditioner at $5,000. Although the calculated credits exceed $1,200, the overall cap limits the total to $1,200. Individual items also have limits, like $250 per door and $600 per energy property, which reduce the total claimable credit.
