There are a lot of reasons you might want to upgrade the equipment and systems around your home to be more energy efficient. Not only can you improve your utility bills, but you may also, in some cases, be able to lower your tax bill.*
With 2022 tax season upon us, now is a good time to review the improvements you made in 2021 and see which ones might qualify for federal tax credits. Additionally, you could use this information to plan for upgrades in 2022 that you can use on your taxes next year. If you decide to claim these credits, you’ll use “Form 5695: Residential Energy Credits.”
It may also be helpful to know the difference between a credit and a deduction. Tax credits lower the amount of tax you owe, dollar for dollar, whereas deductions reduce your taxable income. Some tax credits are nonrefundable, meaning, they can lower your tax liability to zero, but not below zero, so you won’t get a refund of the difference.
There are at least two federal, energy-related tax credit programs that may benefit homeowners:
- Residential Energy Efficient Property Credit. This package of tax credits rewards homeowners who install renewable energy sources. The program is good through December 31, 2023. Qualifying energy systems include solar, wind, geothermal, fuel cells and biomass stoves. The tax credit is tiered and depends on the year when the improvements are made. It is not limited to existing primary residences only, as second homes and new construction may also qualify.
- Non-business Energy Property Credit. This program covers qualified energy efficiency improvements made to your primary residence by December 31, 2021. The maximum for this category of tax credits is $500 combined over the life of the program.
Here are six home improvements that may qualify under one of these programs.
- Solar panels (or other renewable energy systems): When you add solar panels to your home, you may be eligible for the Residential Energy Efficient Property Credit. You could claim up to 30% of the cost, depending on when the improvements were made. Other renewables that qualify include geothermal heat pumps, solar-powered water heaters, small wind turbines and biomass stoves.
- Replacing a roof: It’s hard to overstate the importance of a good roof. It protects the structure of your home as well as your belongings. If you find yourself needing a new roof on your primary residence, using asphalt or metal with pigmented coatings or cooling granules may help you qualify for a Non-business Energy Property Credit for 10% of the cost, up to $500.
- Windows, Doors and Skylights: Older windows and exterior doors can be a source of air leaks, wasting a lot of energy (and money!). Make your home more comfortable to live in by replacing drafty materials in your home with more efficient, air-tight options. You don’t have to replace ALL your windows and doors to qualify for a tax credit. You’ll just want to make sure you’re using ENERGY STAR certified products. Tax credits are capped at $200 for windows and $500 for doors and skylights (installation costs are not covered).
- Insulation: Adding more insulation is another upgrade that can significantly improve the comfort of your home, helping it stay warmer in the winter and cooler in the summer. Bulk insulation products—batts, rolls, expanding spray, etc.—typically qualify, as do products that reduce air leaks, such as weather stripping, caulk and house wrap. Once again, you may be able to claim 10% of the cost, up to $500 (not including installation), regardless of whether the work was done by you or a professional.
- Air conditioning: Is your aging air conditioner on its last legs? Or is your older home a sweatbox in the summer without AC? By adding central air or upgrading to a more energy efficient unit, you could qualify for a tax credit of up to $300. Make sure you check which units will qualify and ask your HVAC contractor for a Manufacturer’s Certification Statement to keep in your tax files.
- Non-solar water heaters: A cold shower can ruin anyone’s day. If your water heater has seen better days, replace it with a more efficient model for up to $300 in tax credits on qualifying units. These may include gas, oil or propane water heaters as well as electric heat pump water heaters.
These are just some of the possible tax credits available to homeowners. Many states also offer tax incentives, and utility companies often have rebates or other programs to help homeowners improve the energy consumption in their homes. Use the ENERGY STAR rebate finder to look for deals in your area.
Important tips to keep in mind:
- Consult a tax professional for advice about your specific situation.
- Keep good records. This includes all receipts for materials and professional services, the Manufacturer's Certification Statement and the product performance (NFRC Ratings/ ENERGY STAR Qualification) information.
- Do your research to understand the specific limitations and requirements for each type of deduction or credit. For example, some tax credits include installation, while others don’t.
- Track the deadlines. To be eligible for the Non-business Energy Property credits, improvements must have been completed by December 31, 2021. However, the tax credits for Residential Energy Efficient Property upgrades are available through December 31, 2023.
- Re-file if you missed a previous year’s improvements. The IRS lets you refile your taxes if you neglected to claim a tax credit for which you were eligible in a prior year.
Even with tax credits and other incentives, some of these upgrades can be costly. Another tax-advantaged option to explore is whether you qualify for a home equity loan. When used for home improvements, the interest on a home equity loan could be tax deductible. You may also want to consider a cash-out refinance as a source of funds to help offset large expenses.
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Sources: EnergyStar.gov, IRS.gov, TurboTax.Intuit.com, Constellation.com
*The tax credit information contained within this article is provided for informational purposes only and is not intended to substitute for expert advice from a professional tax/financial planner or the Internal Revenue Service (IRS). Consult a tax professional for advice about your specific situation.