Are There Tax Credits for Residential Energy Efficiency?

 Posted on February 20, 2025 in Taxation Law

Due to ongoing concerns about climate change, the government is looking to promote energy efficiency and encourage people to reduce the amounts of energy they use. While making improvements to a home can help improve efficiency and reduce costs for electricity or natural gas, these improvements can be cost-prohibitive. Fortunately, there are some tax incentives for homeowners who make these types of modifications.

Understanding what tax credits may be available, when they can be claimed, and how to maximize tax savings can be difficult due to complex rules and regulations. A San Jose, CA tax attorney with a strong understanding of tax laws can provide guidance on these issues.

Energy Efficient Home Improvement Credit

Homeowners may receive tax credits for making improvements to their homes that will increase energy efficiency. The Inflation Reduction Act of 2022 made some changes to this credit, increasing the amounts that taxpayers can claim for improvements made after January 1, 2023. In general, taxpayers can claim credits for 30 percent of the costs of qualifying home improvements, although there are caps on the amounts that may be claimed.

There are three categories of home improvements that qualify for tax credits:

• Qualified Energy Efficiency Improvements: These include energy-efficient doors, windows, skylights, or insulation materials. Credits of up to $250 per exterior door may be claimed, with a maximum credit of $500 for multiple doors. The maximum credit for exterior windows and skylights is $600, and the maximum credit for insulation materials is $1,200.

• Residential Energy Property Expenditures: These include air conditioners, furnaces, water heaters, boilers, and heat pumps. A maximum credit of $600 per item may be claimed for central air conditioners and furnaces, water heaters, and boilers that use oil, propane, or natural gas. Heat pumps using electricity or natural gas and biomass stoves or boilers do not have a cap.

• Home Energy Audits: Inspections that identify the ideal energy-efficient improvements that may be made will qualify for tax credits, and the cap for these credits is $150.

In addition to caps on credits that may be claimed for individual items, there is an annual cap of $1,200 for most improvements, as well as a cap of $2,000 for natural gas heat pumps and biomass stoves or boilers. Based on the improvements made by a homeowner, a total credit of $3,200 could potentially be claimed.

The Energy Efficient Home Improvement Credit can only be claimed for improvements made on a property owned by a taxpayer and used as their primary residence. The credit is nonrefundable, and it may only be applied to a taxpayer’s tax liability in the tax year during which the improvements were made. Credits cannot be carried forward to later tax years.

Residential Clean Energy Property Credit

The Inflation Reduction Act also made some changes to the tax credits that are available for homeowners who make improvements to their homes to incorporate clean energy solutions. In general, taxpayers can claim credits for 30 percent of the costs of these improvements, with no limits on the amount of credits that can be claimed. These credits are available for improvements made after January 1, 2022.

Credits may apply to improvements such as solar panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology. Taxpayers can claim this credit regardless of whether they own or rent the property where improvements are made, as long as the home is their primary residence.

The Residential Clean Energy Property Credit is nonrefundable, and it may be used to reduce a taxpayer’s tax liability in the tax year during which improvements were made. Any unused amount of tax credits may be carried forward to future tax years.

Contact Our San Jose, CA Tax Law Attorney

If you have questions about what tax credits may be available to you, or if you are facing a tax audit that may review credits you have claimed, our San Jose, CA tax lawyer can provide you with experienced legal help. Contact John D. Teter Law Offices at 408-866-1810 to discuss your tax issues in a consultation.