Over the last few decades, both the federal government and a number of state governments have made their tax codes “greener.” In doing so, they incentivize homeowners, builders and commercial property owners to invest in energy-efficient materials and equipment. Beginning in the early 2000s, Congress amended the Internal Revenue Code to include several tax credits for energy efficiency in residential buildings. Today, homeowners can claim three credits on their annual tax returns. These include the Solar Investment Tax Credit, Renewable Energy Tax Credit and Nonbusiness Energy Property Credit. In this post, we explain which home improvements qualify for an energy tax credit in 2022.
Understanding the Three Federal Energy Tax Credits for Homeowners
Residential Energy Efficient Property Credit
Congress and the IRS introduced a series of energy-efficiency tax credits for homeowners in the late 1970s. However, it was not until 2005 that the Residential Energy Efficiency Property Tax Credit was established by the US Federal Government. According to an Energy Star resource, the Energy Policy Act (EPACT) of 2005 created the framework for today’s energy efficiency tax credits.
At the time, Residential Energy Efficiency Property Credits removed only 10% of the cost of an improvement or piece of equipment. Today, the tax credit is equal to between 22 and 30% of the cost of equipment and improvements.
Since 2006, similar residential energy tax credits have been introduced and renewed by the House Committee on Ways and Means. Most recently, Representative Mike Thompson – a Democratic Congressman from California – introduced H.R.848 in February 2021. Also called the GREEN Act of 2021, this bill extends and adds to the existing Residential Energy Efficiency Property Credit. Of course, this bill has yet to be signed into law.
As of February 2022, the most recent legislation to impact the residential energy efficiency property tax credit was the BBA. This legislation is better known as the Bipartisan Budget Act of 2018. It added small wind turbines, fuel cells and geothermal heat pumps to the list of what qualifies for these federal tax credits.
Which Energy Saving Improvements Qualify for the Residential Energy Efficiency Property Credit?
In his article “Home Improvement and Residential Energy Credit” for The Balance, William Perez outlines which improvements qualify for this tax credit. According to Perez, “if you install alternative energy equipment…you can claim the residential energy efficient property credit.”
These renewable energy tax credits reduce your tax liability by “a percentage of the cost of alternative energy equipment that’s installed” in your home. It also includes the cost of installation for most equipment. Perez notes that “solar hot water heaters, solar electric equipment, wind turbines, and biomass fuel cell property” all qualify. In order to qualify for the residential energy efficient property credit, each of these must meet current federal Energy Star standards.
The Internal Revenue Service (IRS) notes that installing a new, energy-efficient roof generally does not qualify for this tax credit. However, there are some exceptions. The IRS resource “Energy Incentives for Individuals: Residential Property Updated Questions and Answers” explains. According to the IRS, “some solar roofing tiles and solar roofing shingles [that also perform] the function of traditional roofing” could qualify.
Any qualifying equipment added to a residential property between 01 January 2017 and 31 December 2019 is eligible for a credit. This credit is worth 30% of the cost incurred. Qualifying equipment placed between 01 January 2020 and 31 December 2022 is eligible for a credit worth 26% of residential energy property costs incurred. By the end of the 2023 tax year, this percentage falls to just 22%. Homeowners who made changes to their property last year can take a credit worth 26% of new equipment and installation costs.
Limitations and Restrictions
According to the IRS, there is no limit for wind, solar and/or geothermal equipment. In fact, “only fuel cell property is subject to a limitation.” This limitation amounts to “$500 with respect to each half kilowatt of capacity of the qualified fuel cell property.”
How the Residential Energy Efficiency Property Credit Could Change in 2022
The Growing Renewable Energy and Efficiency Now Act of 202 recently proposed by Congress would extend this credit for another five years. Also known as the GREEN Act of 2021, this bill would bring the credit back up to 30% for a period of time.
This bill also lengthens the list of eligible improvements and equipment by including energy storage technology. Congress’ GREEN Act would also create a new type of tax credit intended to reward environmental justice programs.
Nonbusiness Energy Property Credit
Next on our list of home improvement tax credits is the nonbusiness energy property credit. Like the REEP credit, the nonbusiness energy property credit was first added to the Internal Revenue Code by Congress in 2005. Both the Further Consolidated Appropriations Act of 2020 and the Continuing Appropriations Act and Other Extensions Act of 2021 extended this credit.
According to Joy Taylor in “2 Tax Credits to Claim for Energy-Efficient Home Renovations” for Kiplinger, this credit is “less valuable” than the former. However, it can still help reduce the tax liability of homeowners who made “smaller energy-saving purchases for a primary residence in 2021.” The Internal Revenue Code qualifies certain types of insulation, exterior doors, skylights, energy efficient windows and many other improvements for this energy credit. While Taylor notes that “this may sound like a generous tax break,” it doesn’t actually amount to much.
Which Energy Efficient Home Improvements Qualify for the Nonbusiness Energy Property Tax Credit?
The TurboTax resource “Energy Tax Credit: Which Home Improvements Qualify?” provides an exhaustive list of improvements covered by the nonbusiness energy property tax credit. This resource breaks improvements covered by the credit into two categories: qualified energy efficiency improvements and residential energy property costs. The former includes insulation, energy efficient exterior windows, skylights and roofing materials with a thermal efficiency rating.
The latter includes electric heat pumps and water heaters and “propane or oil hot water boilers.” It also includes “central air conditioning systems.” Other qualified energy efficiency improvements include “natural gas, propane or oil water heaters, stoves that use biomass fuel” and certain types of furnaces.
According to TurboTax, improvements only qualify for the Nonbusiness Energy Property Credit if they meet Department of Energy standards. Because of this, you should consult with your builder or the manufacturer of these products before claiming the tax credit.
As long as these energy saving improvements qualify, homeowners can claim between 10% and 100% of the cost incurred. TurboTax notes that you “can claim a tax credit for 10% of the cost of qualified energy efficiency improvements.” You can also claim “100% of residential energy property costs.” Unfortunately, a number of restrictions and limitations apply to this credit.
Limitations and Restrictions
In her article for Kiplinger, Joy Taylor notes that “the total credit is worth at most $500.” Worse yet, “amounts taken in prior years count against it.” This means that if you claimed a $200 credit for an efficient HVAC system in 2019, you have limited future credit claims. You can only claim an additional $300 “until the credit expires in 2022.”
There are also lower caps for specific items. For example, “no more than $150 can be claimed for water heaters and furnaces, $200 for windows and $50 for a furnace-circulating fan.”
Solar Investment Tax Credit
Last on our list of tax credits for energy efficiency and renewable energy is the solar investment tax credit. Technically, this tax credit now falls under the umbrella of the more inclusive Residential Energy Efficient Property Credit.
As with the general REEP credit, credit value for the solar investment tax credit is a percentage of the total cost incurred. Homeowners can claim a percentage of the cost of materials and installation of solar panels and energy storage. You can claim 26% of the cost of solar panels or energy storage installed last year as a tax credit on your 2021 return.
Which Home Improvements Qualify for the Federal Solar Investment Tax Credit?
In his article “Green Energy Tax Credits for Home Improvement & Energy Efficiency” for MoneyCrashers, Brian Martucci describes the solar investment tax credit. According to Martucci, “the solar investment tax credit applies to two types of residential solar energy systems.” These two types of systems are solar panels – also called photovoltaic solar electricity generation systems – and solar energy storage systems.
Most solar energy storage systems are either off-grid systems, on-grid systems, hybrid systems or solar batteries. Perhaps the most famous solar energy storage system is the Tesla Powerwall – a rechargeable lithium-ion battery produced by Tesla Energy. Martucci notes that energy storage systems that either “store grid electricity or…[use] nonrenewable onsite sources like diesel generators” cannot qualify for the credit.
How Can I Claim These Tax Credits?
If you made any energy efficient upgrades to your home over the last year, you are probably wondering how to claim credits for them. In her article “Energy Tax Credit” for Investopedia, Julia Kagan explains. Kagan notes that both the nonbusiness energy property credit and the residential energy efficient property credit are filed on the same form. They are both “available for taxpayers through Internal Revenue Service Form 5695.” You can download that form here. File form 5695 with your tax return to take advantage of these credits and lower your bill this year!
Do Energy Efficient Improvements Made to Mobile and Manufactured Homes Qualify for Federal Energy Tax Credits?
If you own a mobile or manufactured home, you might be wondering if you can legally claim these tax credits on your federal return. In general, the Internal Revenue Code treats manufactured and mobile homes similarly to the way it treats stick built homes bolted to foundations. Steve Lander explains in his article “Is a Mobile Home Considered a Home by the IRS?” for SF Gate. According to Lander, “the Internal Revenue Service sets a relatively low bar for what qualifies as a home.” He notes that even houseboats and trailers qualify.
Your mobile or manufactured home should qualify for these federal credits as long as other requirements outlined above were met. However, you might not be able to claim energy credits and deductions tied to state and local property taxes. The forms you file with the IRS might also differ if you own a mobile or manufactured home rather than a stick-built house.
Do Any Other Home Improvements Qualify for Federal Tax Credits?
You might have read our recent post “Tax Deductions and Credits for First-Time Homeowners You Need to Know About.” In this post, we note that some other home improvements do qualify for breaks. While there are no further federal tax credits, certain medically necessary home improvements qualify for a federal tax deduction. Tanza Loudenback explains in her article “Are home improvements tax-deductible? Generally only in 2 cases” for Business Insider. Loudenback writes that “renovations to a home for medical purposes may qualify as a tax-deductible medical expense.”
According to Loudenback, “construction of ramps, widening doorways or hallways for wheelchair access…will qualify for a full medical deduction.” They qualify only “as long as their addition does not increase the value of the property.” In this case, you could qualify for a partial deduction. Renovating your home in this way could also reduce “your taxable capital gain if and when you sell the home.”
Other Federal Energy Tax Exemptions, Deductions and Credits You Can Claim on Your Personal Tax Return in 2022
Residential Energy Conservation Subsidy Exclusion (Personal)
You might also be able to save money on your tax bill by claiming the residential energy conservation subsidy exclusion. The International Energy Agency IEA resource Residential Energy Conservation Subsidy Exclusion explains how this exclusion could limit your tax liability. According to the IEA, you do not need to report “energy conservation subsidies provided by public utilities” as income on your tax return.
Referencing Section 136 of the IRS Code, the IEA elaborates. This section notes that gross taxable income cannot include “any subsidy provided (directly or indirectly) by a public utility'” for energy conservation. These measures “include installations or modifications…designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.”
Plug-In Electric Drive Vehicle Tax Credit
The plug-in electric drive vehicle tax credit might not technically relate to homeownership. Because it is a federal tax credit related to energy efficiency and property ownership – however – we have included it in his list. Alicia Tuovila explains this tax credit in her article “Form 8936: Qualified Plug-in Electric Drive Motor Vehicle Credit Definition” for Investopedia.
Tuovila writes that the IRS “offers tax credits to owners…of certain plug-in electric drive motor vehicles.” These include “passenger vehicles, light trucks, and two-wheeled vehicles.” To find out if your car, truck or motorcycle qualifies, reference Internal Revenue Code Section 30D(a).
According to Tuovila, the credit value “for these types of vehicles ranges from $2,500 to $7,500.” The value of your credit will depend on the capacity of your car’s battery. For example, “a vehicle with a five-kilowatt-hour battery is eligible for the minimum $2,500 credit.” The credit’s value increases “$417 per additional kilowatt-hour up to a maximum of $7,500.”
To claim this credit, file Form 8936 with your tax return.