Save More with Tax Credits for Energy-Efficient Home Improvements

If you are planning a few home improvements that will boost the energy efficiency of your house, you may save some money on your projects under the Inflation Reduction Act (IRA), a law designed to address climate change. While the law is designed to help businesses adopt more eco-friendly measures and jump-start clean energy production, there are also incentives for individuals to "go green" and save some money.

For example, homeowners can cut their tax bill by installing new energy-efficient windows, doors, water heaters, furnaces, air conditioners, etc. That's because the IRA extends and enhances two tax credits that reward "green" upgrades to your home. 

There is also a new electric vehicle tax credit and a revived tax break for EV charging equipment at home. Families with low and moderate incomes may also qualify for rebates if they purchase energy-efficient appliances. 

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Energy efficient home improvement credit

One of the tax credits that homeowners may be familiar with called the Nonbusiness Energy Property Credit, expired a few years ago. However, the IRA brings it back to life, improves it substantially, and even gives it a new name, the Energy Efficient Home Improvement Credit.

The previous, expired credit was worth 10% of the costs of installing certain energy-efficient insulation, windows, doors, roofing, and similar energy-saving improvements in your home. You could also claim the credit for 100% of the costs associated with installing certain energy-efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers, and air circulating fans. 

However, there was a lifetime limit of $500 for the credit (e.g., credits taken in previous years counted towards the limit). There was also a $200 lifetime limit for new windows. There were also other individual credit limits for air circulating fans ($50); some furnaces and boilers ($150); and certain water heaters, heat pumps, and air conditioning systems ($300).

• Beginning with the 2023 tax year (tax returns filed now, in early 2024), the credit is equal to 30% of the costs for all eligible home improvements made during the year. 
• It is also expanded to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. 
• Roofing and air-circulating fans will no longer qualify for the credit. 
• Some energy-efficiency standards are updated as well.

In addition, the $500 lifetime limit is replaced by a $1,200 annual limit on the credit amount (the lifetime limit on windows will go away, too). 

So, if you spread out your qualifying home projects, you can claim the maximum credit each year. The annual limits for specific types of qualifying improvements are modified or better. 

Beginning with the 2023 tax year, they will be:

• $150 for home energy audits;
• $250 for an exterior door ($500 total for all exterior doors);
• $600 for exterior windows and skylights; central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and
• $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,200 annual limit may be exceeded).

For eligible home improvements after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the item, and the person claiming the credit includes the number on their tax return.

Finally, the revised credit will be extended through 2032.

Residential clean energy credit

The second credit homeowners are eying is the current Residential Energy Efficient Property Credit, which also gets a new name under the Inflation Reduction Act. It's now called the Residential Clean Energy Credit. The credit, which was scheduled to expire in 2024, is extended through 2034.

In addition to a name change and extension, the IRA also boosts the credit amount. Previously, the credit was worth 26% of the cost to install qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home. (The credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity.) 

The credit amount was also scheduled to drop to 23% this year and then expire in 2024. Under the IRA, the credit amount jumps to 30% from 2022 to 2032. It then falls to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.

The scope of the credit is also adjusted. Starting in 2023, it no longer applies to biomass furnaces and water heaters, but it will apply to battery storage technology with a capacity of at least three-kilowatt hours.

Alternative fuel refueling property credit

The EV tax credit was also revamped by the Inflation Reduction Act. However, a related tax credit that may interest certain homeowners was also impacted by the legislation. 

The Alternative Fuel Refueling Property Credit (also known as the EV charger tax credit) is extended through 2032. For homeowners, the credit is worth 30% of the costs of "qualified alternative fuel vehicle refueling property" installed in the home, up to $1,000.

For most homeowners, the "qualified alternative fuel vehicle refueling property" they might purchase is the equipment used to recharge an electric vehicle. (The credit also applies to equipment used to store or dispense an alternative fuel (other than electricity) for motor vehicles.) 

Starting in the 2023 tax year, the credit applies to the purchase of "bidirectional" charging equipment, which can charge the battery of an electric vehicle and allow you to discharge electricity from the battery back out to the electric grid.

High-efficiency electric home rebates

Although not a tax credit, the High-Efficiency Electric Home Rebate Program is also designed to help American families "go green." The program, added by the IRA, will provide rebates to low- and middle-income families who purchase energy-efficient electric appliances. To qualify for a rebate, your family's total annual income must be less than 150% of the median income where you live.

Qualifying homeowners can get rebates as high as:

• $840 for a stove, cooktop, range, oven, or heat pump clothes dryer;
• $1,750 for a heat pump water heater; and
• $8,000 for a heat pump for space heating or cooling.

Rebates for non-appliance upgrades will also be available up to the following amounts:

• $1,600 for insulation, air sealing, and ventilation;
• $2,500 for electric wiring; and
• $4,000 for an electric load service center upgrade.

There are limits on the amount certain families can receive. For instance, a rebate cannot exceed 50% of the cost of a qualified electrification project if the family's annual income is between 80% and 150% of the area's median income. Each qualifying family is limited to no more than $14,000 in total rebates under the program.

The $4.5 billion to be allocated for rebates will be distributed to families through state and tribal governments that establish their own qualifying programs. The funds will be available through September 30, 2031.

To learn more about how you might save, the White House has an interactive page on its website with examples of how homeowners can save money on energy-efficient upgrades. 

Also check out Kiplinger's coverage of tax credits in the Inflation Reduction Act.

More on Inflation Reduction Act Tax Credits

• The Inflation Reduction Act and Taxes: What You Should Know
• How the EV Tax Credit Works
• The Federal Tax Credit for Electric Vehicle Chargers is Back