IRS Provides Clarity on Energy Tax Credits in the Inflation Reduction Act

Guidance issued on energy-efficient home improvements and residential clean energy property credits

Thinking about making energy-efficient home improvements? Then, now’s the time to do it. The IRS released FAQs to provide clarity on certain federal tax credits under The Inflation Reduction Act of 2022 (IRA). Enacted on August 16, 2022, the IRA is intended to incentivize individuals and businesses who invest in, among other things, a transition to alternative, renewable, and/or clean energy sources. The IRA amended or added credits, and the newly released FAQs provides guidance for the Residential Clean Energy Property Credit and the Energy Efficient Home Improvement Credit.

You may be entitled to claim these federal income tax credits by making energy-efficient improvements to your home, which includes your houseboat, mobile home, cooperative apartment, condominium, or manufactured home if located within the United States.

Residential Clean Energy Property Credit (Previously: Residential Energy Efficient Property Credit)

The IRA extended the residential clean energy property tax credit through 2034. The credit percentage is 30 percent for eligible property placed in service after December 31, 2021, and before January 1, 2032, 26 percent for eligible property placed in service in 2033, and 22 percent for eligible property placed in service in 2034. No credit is available for property placed in service after December 31, 2034. 

The following property is eligible for the residential clean energy property credit:

• solar electric property expenditures (solar panels)
• solar water heating property expenditures (solar water heaters)
• fuel cell property expenditures (maximum $500 credit for each half kilowatt of capacity of qualified fuel cell property)
• small wind energy property expenditures (wind turbines)
• geothermal heat pump property expenditures
• battery storage technology expenditures

Energy Efficient Home Improvement Credit (Previously: Nonbusiness Energy Property Credit)

The IRA extended the energy-efficient home improvement credit through 2032. Through December 31, 2022, the credit is a $500 lifetime credit. Beginning with the 2023 tax year, the credit is 30 percent of eligible costs for energy-efficient improvements to existing homes. The following property qualifies for the energy efficiency home improvement credit when certain requirements are met:

• Building envelope components: 
  • exterior doors ($250 per door/$500 annual credit limit)
  • exterior windows and skylights ($600 annual credit limit)
  • insulation materials or systems and air sealing materials or systems 
• Home energy audits ($150 annual credit limit)
• Residential energy property ($600 annual credit limit per item):
  • central air conditioners
  • natural gas, propane, or oil water heaters
  • natural gas, propane, or oil furnaces and hot water boilers
  • improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property and enable its installation and use.
• Heat pumps and biomass stoves and biomass boilers
  • electric or natural gas heat pump water heaters
  • electric or natural gas heat pumps
  • biomass stoves and biomass boilers

There is a $1,200 aggregate yearly energy efficiency home improvement tax credit maximum for all building envelope components, home energy audits, and residential energy property. Heat pumps and biomass stoves and biomass boilers have a separate aggregate yearly credit limit of $2,000. Therefore, the maximum total yearly energy-efficient home improvement credit amount is $3,200. 

Taxpayers seeking to claim these energy tax credits should review the FAQs from the IRS.

Effective tax planning can help determine if you qualify for these tax credits or any of the other tax incentives under the IRA. What’s in it for you? Talk with your accountant or contact Don Warrant at Don.Warrant@freedmaxick.com.