A guide to residential energy tax credits: How homeowners can save money with green improvements

There’s a lot of good reasons to go green and the potential to save on taxes is just one of them. In addition to the usual tax deductions you can get for your house, people who make energy-efficient improvements to their home can benefit from two main energy tax credits — the Energy Efficient home Improvement credit and Residential Clean Energy Property Credit — both of which have been extended and expanded, thanks to the Inflation Reduction Act in August 2022.

You don’t necessarily have to make majorly pricey improvements, like adding solar panels, to qualify. Sometimes the regular upkeep and maintenance you already had on your to-do list can help you get a credit – you could even earn a tax credit for replacing your windows. Additionally, if you have an electric car, adding a charging station to your home can also garner you savings.

What appliances qualify for the energy tax credits?

There are a variety of improvements you can make to qualify for energy credits, whether they’re clean electricity products, heating, cooling, and water-heating appliances, and more. 

Here are some examples:

• Air source heat pumps
• Central air conditioners
• Gas, oil, and propane hot water boilers
• Biomass fuel stoves (that burn agricultural crops and trees, wood and wood waste, plant, grasses, and fibers)
• Gas, oil, and propane furnaces
• Heat pump water heaters
• Solar water heaters
• Gas, oil, propane water heaters
• Geothermal heat pumps
• Backup power battery storage with capacity of 3 kWh or greater

For most equipment to be eligible, it must pass standards set by the Energy Star program. You can learn more about appliance and equipment specifications on their website.

Related: Baseboard heating vs. forced air — What's the difference?

Can you get a tax credit for replacing windows?

You might be able to get a tax credit if you update your home with exterior windows or skylights that meet Energy star’s efficient requirements. These include vertical and horizontal slider windows, fixed casement windows, sliding patio doors, and more. This tax credit is limited to $200 if you’re filing for the 2022 tax year. For tax year 2023, however, there will be no unique limit for windows.  Continue reading below for more information on the tax credits. 

Energy Efficient Home Improvement credit

The energy efficient home improvement credit was formerly called the Nonbusiness Energy Property Tax Credit. It allows homeowners to get a credit for a percentage of the total costs they spent on qualified improvements (including appliances), which make their home or property more energy-efficient. 

Here are some examples of what qualifies:

• Biomass stoves
• Windows and skylights
• Exterior doors
• Central air conditioners
• Water heaters (natural gas, propane, or oil)
• Electric heat pumps and certain electric heat pump water heaters
• Hot water boilers (natural gas, propane, or oil)
• Insulation material designed to reduce heat loss or gain (like metal roofs with appropriate pigmented coatings or asphalt)
• Home energy audits (starting January 1, 2023)

How much is the credit for?

If you’re filing 2022 taxes, you can receive 10% of the total costs of most improvements, and there is a lifetime limit of $500 (so if you already claimed that much in prior years, then you won’t be able to get a tax credit this year.) 

All of that changes in 2023. Starting January 1, the tax credit increases to 30% — and there will no longer be a lifetime limit, only an annual one of $1,200 that resets each year. (Keep in mind these rules apply when you file your 2023 taxes, in 2024.) 

Certain improvements continue to have their own individual credit limit. For example, the maximum you can claim for installing an air conditioner is $600. You can see the full list of credits and the differences between 2022 and 2023 available on Energy Star’s website.

Residential Clean Energy Credit

Another way to get save on taxes is with the Residential Clean Energy Credit when you make certain eco-friendly improvements to your home that use clean energy sources. 

Making the following improvements can typically qualify for the residential Energy Credit:

• Solar panels (general roofing material expenses may not apply)
• Solar water heaters
• Geothermal heat pumps
• Small wind turbines
• Fuel cell property 
• Battery storage (starting in 2023)

How much is the credit for?

You can get an income tax credit for 30% of the costs of installation for qualifying improvements — and there are no limits as to how much you can claim. The only exception is for fuel cell expenditures, which are capped at $500 for each half kilowatt of capacity of the qualified fuel cell.  You can also include the costs of labor when calculating the credit.  You can also include the costs of labor when calculating the credit.

This tax credit was set to expire in 2024, but has been extended until 2034. The amount of tax credit you can receive will decrease over time though, based on the year you purchase and make the improvements. So if you’re making your home green it’s a good idea to do it sooner rather than later so you can claim the maximum credit. 

How to claim energy credits on your taxes 

Credits can directly lower your tax liability. If you owe $1,000 in taxes and your energy credit comes out to $700, then you will only owe $300 in taxes. 

Both the Energy Efficient Home Improvement Credit and Residential Energy Credits are nonrefundable, which means you won’t get any extra money back (a refund) if you don’t owe any taxes. For example, if you owe $1,000 in taxes and have an energy credit of $1,500 you won’t receive a $500 refund. 

Claiming the energy tax credits is a fairly straightforward process. To qualify for either program, you just need to file Form 5695 with your annual tax return (Form 1040). When you file your tax return and Form 5695, you need to include any relevant receipts relating to the expense you want to earn a credit for. 

You can use this same form to carry any residential energy property credits forward from 2021 or to carry an unused portion of the residential clean energy credit to 2023. The IRS has strict rules on which credits carry over, and which do not. Similarly, the cost of labor can be included when calculating the credit for certain improvements (solar panels, for example), but not others (like replacing your doors).

To better understand how the Resident Clean Energy Credit works and how to qualify, we recommend you refer to the IRS Fact Sheet and Instructions for Form 5695. You can also hire an accountant when it’s time to file your taxes for additional assistance. 

Learn more about tax-deductible home improvements and repairs

More tips for maximize energy savings

To maximize your energy savings, you can look into what state tax credits your energy efficient home improvements can also qualify for. That way, you can try to qualify for both federal and state tax credits.  You can also hire a professional for an energy audit and suggest improvements for your property.

Look into state energy tax credits

The Database of State Incentives for Renewables & Efficiency allows you to search for potential credits by the state you reside in. It can be a good idea to research these credits before you plan any renovations to your home so you can better understand how to maximize your energy savings. 

For example, California has 161 policies and incentives relating to renewable and efficient energy. The state of Texas has 116, and New York has 103. Not all of those incentives are tax credits and some are for businesses, but they provide a starting point to learn more about the potential tax credits in your state. 

Get a professional energy assessment 

If you need help determining which improvements you should make in your home, you can pursue a professional energy assessment. You can hire a professional who will help you make a plan that can improve the energy efficiency of your home, save you money, and make your home more comfortable. 

These professional auditors have industry credentials and can make a detailed report of your home’s current energy use. The way this process works is the energy assessor will do a detailed room-by-room examination of your home and your past utility bills in order to determine what the sources of energy loss in your home are. 

To find a qualified energy assessor, you can turn to:

• Your local or state government energy or weatherization office
• Your energy utility company
• The Residential Energy Services Network 

There’s a lot of incentive to make your home more green and it’s worth the time, money, and effort that goes into these improvements. Making your home more energy efficient can not only help the environment and save you money on taxes, these improvements can help you lower your energy bills on an ongoing basis.