Inflation Reduction Act Changes to Energy Efficiency and Production Credits for your Home

This post is based on early readings of the new law so might be missing a few nuances and could even be wrong in some places. It is going to have both the old and new rules. It is an almost direct copy of the new chapter on the subject in my forthcoming edition of Everyday Taxes (maybe changing the name so keep an eye out here for release date and name). Since it is so late in 2022, comparing the relative benefits of the two years before making a decision isn’t really helpful, though, in general, delaying to 2023 is the going to be the best idea. So I am going to leave the 2022 information right where it was, just below this paragraph, and then put all of 2023’s brand new information completely separately to follow it. This way I don’t have to intermix the rules and talk about name changes and everything else.

 Here is the 2022 and before info:

 The two credits for energy efficient home improvements are quite restrictive. I will cover each credit separately, but there are some common items to consider:

1.     They must be for your MAIN home, the one you live at most of the time. That home can be a house, boat, RV, fifth wheel, condo or houseboat.

2.     You must own it (you can still be paying a mortgage).

3.     You must reduce your home's basis by the amount of the credit (this is normally the price you paid for the home plus improvements and is used to determine the gain when you sell - and a lot of other less likely things).

4.     Costs are considered paid when the work is complete, or when you move back into the home if you had to leave while the work was completed.

5.     Most of the time, if you are having a home constructed, the builder will take any credits for energy efficiencies associated with the home, especially if you are buying a tract home from one of the major builders in a planned community. If you are having a custom house built, communicate with your builder, and your tax professional, to ensure it is clear who is qualified to take and who is taking any credits available.

Here are the details on the two credits:

Residential Energy Efficient Property Credit:

1.      This is the big one, and the hard one. To get this one, you need to have installed truly alternative energy sources as a part of your home. Examples are solar power, wind, geothermal, fuel cell, or solar hot water. For 2017 and beyond, only solar power projects get the credit. Work with the installer and your tax professional to determine if you qualify and get documentation from the installer. Taxes and government subsidies are a big part of determining the cost effectiveness of these type of projects, so you need to do more than just read this chapter.

2.      The credit was up to 30% of the qualified costs, with each type of improvement having its own maximums. Starting in 2020 the credit started to phase out. The percentage is 26% in 2020 through 2022, 22% in 2023, and the credit is gone in 2024 (not really – it is now a new credit as discussed at the beginning of the chapter).

3.      This credit is available for new construction.

4.      If you share the house with someone other than your spouse, you get the credit based on what you paid, and the maximum is applied based on the percentage paid by each occupant.

5.      The credit cannot reduce your taxes below zero, so it may take many years to get full benefit from the credit. Many solar sales companies aggressively market, or worse, make loan payments based on these credits. Make sure you understand how, when and how much you will be getting back on your taxes BEFORE you sign a contract or take out a loan.

Non-business Energy Property Credit:

1.      This is the much more common credit, so I'm going to provide more details.

2.      The Non-business Energy Property Credit is 10% of qualifying costs, with a LIFETIME maximum credit for all costs of $500.

3.      The LIFETIME maximum credit for windows is $200 (this is inclusive, not in addition to the $500 limit; if you take $200 for windows, you only have $300 for the rest of your life for other things).

4.      They are subject to AGI limitations for 2014 that were unavailable at the time this book was being published.

5.      The credit is available for insulation, exterior doors, windows, skylights and roofs that are SPECIFICALLY designed to reduce heat loss or gain.

6.      It also applies to water heaters, heating systems, and air conditioners that are near the most efficient available at the time of installation.

7.      The instructions for the current year form will identify the standards to be met, but the manufacturer or installer can also tell you. They must provide, and you must maintain, documentation to prove that it meets these standards. I recommend that you make the contractor or salesman SHOW you the documentation and proof that it meets the standards. Energy Star doesn't mean crap—these items have to be really high quality (and generally more expensive than non-qualified items).

8.      If you share the house with someone other than your spouse, you get the credit based on what you paid, and the maximum is applied based on the percentage paid by each occupant.

9.      If you and your spouse have separate main homes, there are extra hoops to jump through and you will need a bit of professional help to be safe.

Here is the 2023 and later info:

There are still two credits for energy efficient home improvements, one based primarily on improving the efficiency (insulation and more efficient systems) and the other for generating power (wind, solar, geothermal and wood stoves). There are certain requirements you must meet to claim either, detailed here:

1.      They must be for your MAIN home, the one you live at most of the time.

2.      That home can be a house, boat, RV, fifth wheel, condo or houseboat.

3.      You must own it (you can still be paying a mortgage).

4.     You must reduce your home's basis by the amount of the credit (this is normally the price you paid for the home plus improvements and is used to determine the gain when you sell - and a lot of other less likely things).

5.      Costs are considered paid when the work is complete, or when you move back into the home if you had to leave while the work was completed.

6.      Most of the time, if you are having a home constructed, the builder will take any credits for energy efficiencies associated with the home, especially if you are buying a tract home from one of the major builders in a planned community. If you are having a custom house built, communicate with your builder, and your tax professional, to ensure it is clear who is qualified to take and who is taking any credits available.

7.      You can generally rely on the manufacturer’s certification that the specific energy efficient item qualifies for the credit. In later years, there will be specific requirements and code numbers for claiming the credit that they will provide. Their certification does NOT mean that you qualify for the full credit based on your taxes, or that the home you installed them in is your MAIN home as required. It just certifies that the item is energy efficient enough or of the proper type to qualify for the credit. ALWAYS consult a tax professional before investing large sums of money in an improvement that you are planning to get a big credit for. Do this BEFORE signing any contracts.

The two credit names are pretty self-explanatory:

Energy Efficient Home Improvement Credit.

1.      Applies primarily to insulating products and energy efficient HVAC and hot water systems.

2.      It is 30% of the cost of the item with some limitations applied.

3.      There is a $600 per item limit and a $1200 per year total maximum credit limit which is changed and/or modified for certain items as discussed in further areas.

4.      Equipment must meet specific requirements (Energy Star for doors, windows and insulation and specific, ever-increasing criteria for the rest) but you can rely on the manufacturers certification that it qualifies – SAVE THIS! In 2025 and later they must provide Qualified Product Identification Number and you will include these with your tax return.

5.      An Energy Efficiency Audit has a maximum credit of $150.

6.      Doors have a maximum, per door credit of $250 and a $500 per year total limit.

7.      Exterior Windows and Skylights have a per year total credit maximum of $600.  

8.      Heat Pump (not gas or electric) Heating, Air, and Hot Water Systems as well as Wood or Pellet Stoves or Hot Water Heaters have a separate, maximum credit of $2000 that does not count against the $1200 annual limit.

Residential Clean Energy Credit:

1.      This is the big one, and the hard one. To get this one, you need to have installed truly alternative energy sources as a part of your home. Examples are solar power, wind, geothermal, fuel cell, or solar hot water. This also includes battery power storage technology. Work with the installer and your tax professional to determine if you qualify and get documentation from the installer. Taxes and government subsidies are a big part of determining the cost effectiveness of these type of projects, so you need to do more than just read this chapter.

2.      The credit is up to 30% of the qualified costs, with each type of improvement having its own maximums. Starting in 2033 the credit starts to phase out. The percentage is 26% in 2033 and 22% in 2034 and theoretically expires after that. Be aware that these dates have been creeping outward so they may be extended further into the future. Based on political reality surrounding climate change I find it highly unlikely that an incredibly popular credit like this, which is also an easy political point, will ever go away.

3.      This credit is available for new construction.

4.      If you share the house with someone other than your spouse, you get the credit based on what you paid, and the maximum is applied based on the percentage paid by each occupant.

5.      The credit cannot reduce your taxes below zero, so it may take many years to get full benefit from the credit. Many solar sales companies aggressively market, or worse, make loan payments based on these credits. Make sure you understand how, when and how much you will be getting back on your taxes BEFORE you sign a contract or take out a loan.

My Advice:

1.      Be aware that the Solar Credit is not refundable. This means that it cannot reduce your taxes below zero so it may take several years to get the full advantage of it. It is a good idea to look at your tax return from the prior year and see what the number on Line 15 was. If everything (except the Solar) stayed the same, this is a decent estimate for the maximum tax benefit you would get in the first year after installing the panels, and then you can divide your total credit by this amount to see how many years it will take you to get the full credit.

2.      If you are expecting a state tax credit, make sure you fully understand the rules. For example, South Carolina has a 25% credit, which the sales companies LOVE because they could say you only pay 45% of the cost of the panels. But in SC, you can only cut your taxes in half with the credit (vice eliminating them for the Federal Credit) so it can take WAY longer to get the full benefit. Check your state rules and make sure you FULLY understand how you will be getting your tax credit, and how long it will take.

3.      Some states (like Massachusetts) have plans whereby you can get paid for generating alternative energy. Generally these payments will be taxable income but you often will not get a specific tax form from them. As with all unusual sorts of income, contact a tax pro to be sure whether you have to claim them.