The Inflation Reduction Act of 2022 has provided an expansive collection of tax law changes, with most provisions starting in 2023 and enacted through the next decade. For homeowners, included are the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.
Beginning in 2023, the Energy Efficient Home Improvement Credit jumps to 30% (up from 10%) of the sum of the following:
- Expenditures for energy-efficient components in the building envelope, such as windows, doors, skylights and insulation, which meet stated standards.
- Other expenditures that increase energy efficiency, such as an electric or natural gas heat pump water heater; an electric or natural gas heat pump; a central air conditioner; a natural gas, propane or oil water heater or a natural gas, propane or oil furnace or hot water boiler.
- Expenditures for a home energy audit.
There are dollar limitations on the specific amount of energy-efficient property and improvement expenditures that can be claimed as a credit. A $1,200 annual limit replaces the previous $500 lifetime limit on credit-eligible property and the credit will be available through 2032, allowing improvements to be spread out over multiple years.
A $2,000 annual credit limit applies to electric or natural gas heat pump water heaters, electric or natural gas heat pumps and biomass stoves and boilers with a thermal efficiency rating of at least 75%.
To qualify for the energy-efficient home improvement credit, residential energy property must be installed on or in a home in the United States that is used as a residence. The residence does not have to be a taxpayer’s principal residence. In contrast, energy efficiency improvements (energy-efficient building envelope components, such as walls, exterior doors, exterior windows, skylights and insulation) must be installed on or in the principal residence to qualify for the credit.
The Residential Clean Energy Credit amount is also 30% of the amount paid for qualifying property placed in service during the taxable year after 2022, up from 26%. The credit rate decreases back to 26% for property installed in 2033 and to 22% for property installed in 2034. A residential clean energy credit may be claimed if a qualifying property is installed on or connected to an existing or newly constructed home.
Several special rules apply to the credit. Labor costs for on-site preparation, assembly or original installation of qualified property and piping or wiring to interconnect the property to the home qualify for the credit.
Expenditures relating to a solar panel or other property installed as a roof that is a structural component of the house on which it is installed may also be qualifying property.
Barring changes to the Inflation Reduction Act, these increased residential energy tax incentives provide meaningful tax-saving opportunities for years to come.
James Philbin, CPA, PFS, MST, CFP
Partner, Tax & Business Services
Marcum
Boston, MA
james.philbin@marcumllp.com
