By: Emily Newton
The Inflation Reduction Act of 2022 — Public Law 117-169, 136 Stat. 1818 — includes two types of clean energy tax credits that aim to tackle climate change and reduce inflation. Both provide significant tax deductions, and almost any U.S. property owner or renter making home improvements can benefit from them.
Residential Clean Energy Credit
Formerly called the Residential Energy Efficient Property Credit, this amendment increases the tax credit to 30% on green energy installations. It was previously a 26% credit.
Most home improvement projects aren’t tax deductible because the government considers their expenses. However, effective for tax years beginning after December 31st, 2022, the Residential Clean Energy Credit subsidies:
- Solar panels
- Residential wind turbines that generate up to 100 kilowatts of electricity
- Fuel cells that use a renewable resource — such as hydrogen — to generate residential energy. They must have a minimum of 0.5 kilowatts of power generation capacity.
- Energy storage batteries
- Solar-powered water heaters for indoor water use — swimming pools and hot tubs don’t qualify. At least 50% of the home’s water-heating capacity must be solar.
- Energy-Star-rated geothermal heat pumps
Clean energy tax credits help states meet their individual energy goals. Vermont, for example, wants to use 90% renewable energy by 2050. They also lower the cost of home improvements and improve energy efficiency, which can lead to lower electric bills over time. For example, some property owners can reduce their energy costs by up to 75% simply by installing solar panels.
The Residential Clean Energy Credit generally does not cover roofing expenses, even if done in preparation for installing solar panels. However, specific solar equipment — such as solar roofing tiles and shingles — may qualify for the credit because they are both a form of roofing and energy generation.
This credit allows certain exempt people to treat credits as income tax payments. Even those with an insufficient income tax liability can still benefit from the credit, and people can also sell their credits.
Clean energy tax credits aren’t refundable. People cannot use excess credit as a payment on their tax return if they have more energy credit than their total tax. However, unused energy tax credits claimed on a tax return can still roll into future years to offset tax liability.
Energy Efficient Home Improvement Credit
Under the Inflation Reduction Act, the former Nonbusiness Energy Property Tax Credit is now the Energy Efficient Home Improvement Credit. It went into effect on January 1st, 2023 and will be active for ten years.
A building doesn’t have to be a person’s primary residence to qualify for the credit. It covers any taxpayer residence, including second homes, vacation homes and rental properties. Beginning in 2025, people must provide a manufacturer ID number for each qualifying piece of property to receive the tax credit. This measure ensures people don’t get duplicate credits for the same property.
Individual Cost Breakdowns
The clean energy tax credits will cover 30% of qualifying expenses. However, each energy category has a different maximum coverage amount:
- Solar (electricity): 30% of the cost
- Fuel Cells: 30% of the cost
- Wind Turbine: 30% of the cost
- Battery Storage: 30% of the cost
- Heat pumps: 30% of the cost, up to $2,000 annually
- Heat pump water heaters: 30% of the cost, up to $2,000 annually
- Biomass stoves: 30% of the cost, up to $2,000 annually
- Geothermal heat pumps: 30% of the cost
- Solar (water heating): 30% of the cost
- Efficient air conditioners*: 30% of the cost, up to $600 annually
- Efficient heating equipment*: 30% of the cost, up to $600 annually
- Efficient water heating equipment*: 30% of the cost, up to $600 annually
- Electric panel or circuit upgrades for new electric equipment*: 30% of the cost, up to $600 annually
- Exterior doors*: 30% of the cost, up to $250 each for a maximum of $500 annually
- Windows and skylights*: 30% of the cost, up to $600 annually
- Insulation materials*: 30% of the cost
- Home Energy Audits*: 30% of the cost, up to $150 annually
- Home Electric Vehicle Charger: 30% of the cost, up to $1,000 annually
Items with an asterisk are capped at $1,200 annually. For example, if new insulation costs $10,000, the maximum tax credit would still be $1,200, even though 30% of $10,000 is $3,000. This rule helps homeowners diversify their spending.
There are specific energy rating rules for each category as well. For example, windows must have a Most Efficient Energy Star rating, while exterior doors simply need an Energy Star label.
Insulation must meet the International Energy Conservation Code criteria, but heat pumps and biomass stoves must meet the highest efficiency tier established by the Consortium for Energy Efficiency. Electric panel upgrades must be at least 200 amps and be installed as part of another energy-efficient improvement.
How Do Consumers Get the Credits?
Over the next ten years that the clean energy tax credits are active, individuals can receive up to $12,000 back on their taxes by getting up to $1,200 in credits annually. Under the previous credit program, people could only receive up to $500.
Property owners or renters must fill out IRS Form 5695, “Residential Energy Credits, “to receive the clean energy tax credits.” It’s a tax document consumers must include when filing their tax returns. It gives detailed instructions for calculating tax credits for each energy category. Consumers must also have any relevant product receipts on Form 5695, so keeping detailed records of all energy installation costs is a good idea.
Clean Energy Tax Credits Are Driving Change
As people are interested in solving the climate crisis, clean energy tax credits incentivize U.S. renters and homeowners to install energy-efficient appliances and power sources. People may be more willing to make these eco-friendly upgrades when the cost is much lower.
Upgrading houses to be more efficient will reduce people’s electricity bills, foster energy independence, and reduce greenhouse gas emissions. It also allows people to help their fellow Americans from the comfort of their homes.