Expanded Tax Credits for Energy Efficient Improvements in 2023
Tax credits for making energy efficient improvements to the taxpayer’s home have been around for a while, but they got a boost at the end of last year. The Inflation Reduction Act of 2022 increased both the dollar value of the tax credits and the types of expenses that qualify for the tax credits. There are two separate home energy efficiency improvement tax credits in effect for 2023. They are known as the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. This article highlights the particulars of those two credits.
The Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit is a 30% credit for certain qualified expenses for energy efficient home improvements. As is always the case with tax laws, the details matter. Taxpayers can receive up to a $1200 credit each year for energy efficient improvements to exterior doors, windows, skylights, insulation, as well as home energy audits on their residences. Within that category the following limits are in effect:
- Maximum credit of $250 per door, maximum of 2 doors
- Maximum credit of $600 for windows
- Maximum credit of $150 for home energy audits
Taxpayers can also get up to $1200 of tax credit for insulation and air sealing materials, new central air conditioners, hot water heaters, furnaces, and hot water boilers that use propane, natural gas, or oil but there is a $600 per item limit.
The maximum amount of the tax credit for all the above in any tax year is $1200. Taxpayers can get an additional $2,000 of Energy Efficient Home Improvement Credit for the purchase of qualified heat pumps, biomass stoves, or biomass boilers. Meaning that it would be possible to claim up to $3,200 of Energy Efficient Home Improvement Credit in one year. The Energy Efficient Home Improvement Credits are not refundable, and unused portions of the tax credits cannot be carried forward to future tax years. The credits are only for improvements to an existing home. They are not available for new construction.
The Residential Clean Energy Credit
The Residential Clean Energy Credit is for other improvements to the taxpayer’s residence, including a secondary residence as long as the residence is located in the United States. The Residential Clean Energy Credit is a 30% credit on the amount spent on solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage of at least 3 kilowatts.
Unlike the Energy Efficient Home Improvement Credit, there is no limit on the value of the Residential Clean Energy Credit. It is 30% of whatever your qualified expenses are. This credit is also available for both existing homes and new construction. Like the Energy Efficient Home Improvement Credit, this credit is not refundable. It cannot exceed the amount of tax owed, but unused portions of the credit can be carried forward to future tax years until all the credits are used.
You may still qualify for the credit if you are using a portion of your residence as a business property by leasing part of it to a tenant or using it as a home office. If the percentage of the property being used for business is 20% or less, then the taxpayer may claim all the qualified expenses for the credit. If more than 20% of the residence is being used for business, then the qualified expenses must be divided between the business and residential portions of the property, and the credit calculated only on the qualified expenses applicable to the residential portion of the property. (Note that you could still deduct the expenses applicable to the business portion of the property on your business schedule or return.)
Additional Rules
Internal Revenue Service guidance indicates the credit cannot be taken until the installation of the qualifying property occurs. A taxpayer might pay for solar panels in December 2023 but not have the solar panels installed until February of 2024. The taxpayer would not be eligible for the credit until they filed their 2024 tax return.
Previous versions of these credits came with a lifetime limit. There is no lifetime limit for the newer versions, only some annual limits for the Energy Efficient Home Improvement Credit. Taxpayers could claim these credits every year if they have qualifying expenses in multiple tax years.
The credits are only valid for new energy efficient improvement property. You cannot purchase solar panels from your neighbor, have the panels moved from their roof to yours, and claim the credit. The energy efficient purchases must be new equipment.
Here is a useful example from the IRS fact sheet (https://www.irs.gov/pub/taxpros/fs-2022-40.pdf)
In one taxable year, a taxpayer purchases and installs the following: two exterior doors at a cost of $1,000 each, windows and skylights at a total cost of $2,200, and one central air conditioner at a cost of $5,000. All property installed meets the applicable energy efficiency and other requirements for qualifying for the Energy Efficient Home Improvement Credit.
First, 30% of each $1,000 door’s costs is $300, but the per door limit of $250 applies to reduce the maximum possible credit for each door to $250 each. Thus, the taxpayer’s expenditures for exterior doors potentially qualify the taxpayer to claim up to a $500 tax credit.
Next, 30% of the taxpayer’s total $2,200 of expenditures for windows and skylights is $660, but the $600 limit for all windows and skylights applies to limit the taxpayer’s credit for such expenditures to $600. Thus, the taxpayer’s expenditures for windows and skylights potentially qualify the taxpayer to claim up to $600.
Finally, 30% of the taxpayer’s $5,000 cost paid for the central air conditioner is $1,500, but the $600 per item limit for energy property applies to limit the taxpayer’s credit for such expenditures to $600.
Adding these credit amounts yields a sum of $1,700 ($500 + $600 + $600), but the aggregate limit of $1,200 applies to limit the taxpayer’s total amount of Energy Efficient Home Improvement Credit to $1,200
Tax planning is an integral part of financial planning. If you only think about taxes when it is time to prepare your income tax return for the prior year, then you are being reactive and not proactive. MFAA advisors are knowledgeable about tax strategies and can help you build a plan to reduce your tax burden over your entire lifetime, not just for the current or prior year. Find the advisor that’s right for you by checking out their online profiles here.