Harnessing Energy Improvement Tax Incentives to Save Money and Increase Home Efficiency
If there’s an upside to inflation, it might be the energy improvement tax incentives introduced by the Inflation Reduction Act of 2022. These tax credits offer homeowners substantial savings for making specified home energy efficiency improvements.
Why Consider Energy Improvement Tax Credits?
High utility bills can be a significant burden for homeowners trying to maintain and improve their properties. Fortunately, the new energy efficiency tax credits can help offset these costs, providing financial relief and encouraging energy-saving practices.
“There have been a number of tax incentives for energy in the past decades, and they’ve been very helpful,” says Evan Liddiard, CPA, director of federal taxation, federal policy, and industry relations with the National Association of REALTORS® in Washington, D.C. “But these new ones leave them in the dust because there are more incentives and more money on the table. Earlier laws had lifetime limits. Once a taxpayer had credits up to that limit, they couldn’t claim more. But these new rules have no lifetime limits in some of the categories. However, there are some year-to-year limits.”
Two Types of Tax Credits
The tax credits are divided into two types: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit, explains Courtney Klosterman, home insights expert at Hippo Home Insurance Group.
Energy Efficient Home Improvement Credit
This tax credit is available to homeowners making qualified energy-efficient improvements to their homes, such as:
– ENERGY STAR’s most efficient products can earn owners credits up to $600 per year.
– Homeowners can claim up to 30% of what they spend, each year up to 2032.
– These must have thermal efficiency ratings of at least 75%, qualifying for up to a $2,000 credit per year.
Homeowners can also request home energy audits from professional auditors for tax credits of up to $150 per year. These audits can identify areas of energy loss and potential home health and safety issues, potentially saving homeowners up to 30% on their energy bills by making recommended improvements, according to the U.S. Department of Energy.
Residential Clean Energy Credit
This credit supports homeowners investing in renewable energy solutions, including:
– **Solar, wind, geothermal, and fuel cells**
– **Battery storage technology**
“This credit intentionally covers improvements that aren’t common yet,” says Liddiard. “Congress took the time to really look forward to what could be widely available in the next decade.”
Homeowners can claim 30% of the cost of these improvements until 2032, after which the reimbursement drops to 26% in 2033 and 22% in 2034. If all upgrades are done in one year, unused credits can be carried forward to future years, a flexibility not available with the Energy Efficient Home Improvement Credit.
Planning for Maximum Benefits
Proper planning is essential for maximizing these credits. DR Richardson, cofounder of Elephant Energy, advises homeowners to strategically plan their energy efficiency projects. “You want to install the heat pump one year and the heat pump water heater the next year to maximize those credits.”
When claiming the Energy Efficient Home Improvement Credit for improvements made during 2023, homeowners need to file Form 5695, Residential Energy Credits Part II, with their tax returns. The credit must be claimed for the tax year in which the installation was made, not the year of purchase.
Avoid Common Mistakes
Avoid installing equipment that isn’t efficient enough to qualify for the tax credits. Working with a knowledgeable contractor can ensure you select qualifying products. “The federal government doesn’t make it perfectly clear to the average consumer which products are sufficiently efficient,” Richardson warns. “So, you want to work with a contractor. Most buyers are not buying from the store, and the average salesperson would not necessarily know.”
Newer Homes Can Benefit Too
Liddiard shares his personal experience with energy efficiency improvements in his 11-year-old home. “It’s remarkable how much improvement has gone into furnaces in just 10 years,” he observes. “Your home does not have to be 40 years old for you to reap significant benefits and tax credits from energy-efficient home improvements you undertake.”
Homeowners looking to save money and enhance their home’s energy efficiency should consider taking advantage of these new tax incentives. By making strategic improvements and leveraging available credits, you can reduce energy costs and increase the overall value and comfort of your home.