Whether you’re in the market for a new HVAC system or just trying to cut down on your utility bills, several federal incentives are available to help. Here are three of the biggest ones. The Bipartisan Budget Act of 2022 revived and expanded many energy-efficient tax credits. In contrast to a tax deduction, these credits lower the amount of taxes you owe.
Energy Efficient Home Improvement Credit
Homeowners can greatly impact their energy consumption by installing upgrades such as insulation, efficient windows and doors or solar panels. Many of these efforts may qualify homeowners for different tax credits, reducing their overall cost. Unlike rebates, which provide cash back after a purchase, the types of HVAC tax credits reduce the federal income taxes you pay during the year. Typically, you can claim the credit on the same return as your deductions, which you file when you file your annual tax return. The Energy Efficient Home Improvement Credit, originally known as the Nonbusiness Energy Property Credit, was created to help pay for certain energy-efficient home upgrades. This credit can save you up to $3,200 per year through 2032. However, starting in 2023, the lifetime cap has been replaced with an annual limit of $1,200 for each qualified improvement. To be eligible to claim the credit, the improvements must be made to your primary residence. It includes a single-family home, a condominium unit, or a manufactured home. It also doesn’t apply to rental houses or other properties used for business purposes. Additionally, you can only claim the credit if you’re a landlord and your property is rented out for at least 80% of the year.
To improve your home’s energy efficiency, consider getting a free, no-obligation home energy assessment from a certified professional. Then, you can get started on the path to a more comfortable, efficient and sustainable home. And, if you do decide to pursue the Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit, we can help you claim the credit properly and minimize your tax liability.
Residential Energy Efficiency Property Credit
If you’ve made home improvements that save energy, you may be eligible for a tax credit. Tax credits lessen the amount of taxes you owe, as opposed to rebates, which give you cash back. This credit is available for purchasing and installing qualifying energy-efficient equipment in your primary residence. The previous Nonbusiness Energy Property Credit, due to expire in 2024, has been revived and given a new name, the Residential Energy Efficiency Property Credit, with some changes to its limits and types of eligible expenses. This credit is good for homeowners and those who rent or live in a second home used as a primary residence. It now covers up to $1,200 in energy-efficient windows, doors, skylights and insulation, air sealing and roof insulation. The credit also covers energy-efficient furnaces, hot water boilers and central air conditioning systems. It also extends to heat pumps, geothermal units, biomass stoves and boilers.
You can claim this credit on your tax return using IRS Form 5695, Residential Energy Credits, even if you don’t itemize your deductions on Schedule A. However, it’s important to keep in mind that this credit reduces the cost basis of your home, so if you sell your home at some point, you’ll have less equity in the house than you did when you purchased it. As always, keeping receipts or other documentation related to your home improvement purchases is wise in case of an audit. You’ll need proof that you’ve earned the energy-related tax credits for your unique situation. It’s best to consult an experienced certified public accountant who can help you navigate the ever-changing landscape of federal energy tax credits.
Residential Renewable Energy Property Credit
As the name implies, this credit is meant to help homeowners who install renewable energy systems. The rebate is worth 30% of the qualified renewable energy properties cost, including solar panels and solar water heating equipment, fuel cells, small wind energy, geothermal heat pumps, and biomass fuel properties. The credit is available through 2033, and there are individual limits for each type of property. To claim the Residential Renewable Energy Property Credit, the taxpayer must complete IRS Form 5695 and include all relevant receipts when filing their tax return each year. A credit is a dollar-for-dollar reduction in the amount of taxes owed to the federal government, and it can be used to offset all types of tax liabilities that a person might face during a given tax year, including income and self-employment taxes. One important note to remember regarding the Residential Renewable Energy Property Credit is that it can only be claimed on an eligible home that is your primary residence. It is not intended to be used on vacation homes or rental properties but only applies to installations after 2017. The taxpayer must own the property, defined as “your houseboat, condominium, co-op, mobile home, or manufactured home,” and can’t be leased or sold. When calculating qualifying expenses, the amount of any public utility rebates, grants or subsidies must be subtracted from the total costs. Also, any fees paid to a contractor on behalf of the homeowner aren’t eligible for this credit, but utilities that pay credits for clean energy that you sell back to the grid are allowed. The IRS recommends you consult a tax professional for more details and specific guidance on claiming the Residential Renewable Energy Property Credit.