Federal Tax Credits for Energy Efficiency
The Inflation Reduction Act of 2022 empowers Americans to make homes and buildings more energy-efficient by providing federal tax credits and deductions that will help reduce energy costs and demand, as we transition to cleaner energy sources.
Homeowners Can Save Up to $3,200 Annually on Taxes for Energy Efficient Upgrades
Through 2032, federal income tax credits are available to homeowners, that will allow up to $3,200 annually to lower the cost of energy efficient home upgrades by up to 30 percent.
In addition to the energy efficiency credits, homeowners can also take advantage of the modified and extended Residential Clean Energy credit, which provides a 30 percent income tax credit for clean energy equipment, such as rooftop solar, wind energy, geothermal heat pumps and battery storage through 2032, stepping down to 22 percent for 2033 and 2034.
ENERGY STAR provides the following information to help you learn:
How the Tax Credits Work for Homeowners
Save Up to $2,000 on Costs of Upgrading to Heat Pump Technology
These energy efficient home improvement credits are available for 30% of costs - up to $2,000 - and can be combined with credits up to $1,200 for other qualified upgrades made in one tax year.
Save Up to $1,200 on Energy Efficiency Home Improvements
Claim 30% up to $1,200 for these qualifying energy property costs and certain energy efficient home improvements.
Save 30% on Residential Clean Energy Equipment Upgrades
This credit can be claimed for the following qualifying expenditures incurred for either an existing home or a newly constructed home.
How to Claim the Federal Tax Credits
These credits are managed by the U.S. Internal Revenue Service (IRS) and can be claimed with your federal income taxes for the year in which the upgrades are made.
- Claim the credits using the IRS Form 5695.
- Instructions for Form 5695
- Instructions for Form 5695 (Print Version - PDF)
Details for Claiming the Energy Efficiency Home Improvement Credit:
You may claim the energy efficient home improvement credit for improvements to your main home (where you live most of the time). Your home must be in the U.S., and it must be an existing home that you improve or add onto. This credit does not apply to a newly built home. You may not claim the credit if you're a landlord or other property owner and you do not live in the home.
The credits have no lifetime dollar limits. Homeowners may claim the maximum annual credit every year that eligible improvements are made, through 2032. The credits are nonrefundable, so you cannot get back more on the credit than you owe in taxes. You may not apply any excess credit to future tax years.
Details for Claiming the Residential Clean Energy Credit:
If you invest in renewable energy for your home (solar, wind, geothermal, fuel cells or battery storage technology), you may qualify for an annual residential clean energy tax credit of 30% of the costs for qualified, newly installed property from 2022 through 2032. The credit percentage drops to 26% for property installed in 2033 and 22% for property installed in 2034.
You may claim this credit for improvements to your primary home (where you live most of the year). This credit applies to new or existing homes in the U.S. You may not claim the credit if you're a landlord or other property owner and you do not live in the home.
You may be able to claim a credit for some improvements made to a second home in the U.S. that you live in part-time and do not rent to others. Fuel cell property claims for a second home do not apply.
For these upgrades, you can carry forward any excess credit and apply it to reduce the tax you owe in future years. You may not include interest paid, including loan origination fees.
Strategies to Maximize Your Federal Tax Savings
Given the way the annual total limits are structured, it may be practical to spread your home energy efficiency improvements over a few years. Planning your upgrades can help you make the most of the annual credit amounts you can claim. Here are a few examples:
Example 1:
Get an energy audit and improve your home's envelope
A home energy audit can help you identify the most significant and cost-effective energy efficiency improvements your home can benefit from. Additionally, if you are considering upgrading your heating and cooling system, it is wise to optimize your attic insulation first, to reduce the air leaks that contribute to energy waste and make your home less comfortable. Individually, you could claim 30% of the cost of the home energy audit up to $150 and you could claim 30% of the product cost of the insulation, up to $1,200.
Doing both of these upgrades in one year, you can claim a maximum of $1,200.
Example 2:
Upgrade your heating and cooling systems
After Example 1 upgrades, you decide to replace your heating and cooling system for maximum efficiency. You purchase an air-source heat pump that qualifies for the energy efficient home improvement credit. In the same tax year you can claim 30% of the cost of that project, for up to an additional $2,000.
Combined with Example 1 (for which you can claim $1,200), your total claim amount would now be $3,200, which is the maximum allowed in one taxable year.
Example 3:
Replace old windows and doors and get a new heat pump water heater
Suppose you need to replace old windows, two exterior doors, and install a new heat pump water heater in your home. ENERGY STAR Most Efficient windows qualify for the energy efficient home improvement credit. By further improving your home’s envelope with new ENERGY STAR certified exterior doors and a heat pump water heater, you can claim:
- up to $600 (or 30% of the product cost) for upgrading your windows in one taxable year.
- 30% of the product cost up to $250 per door ($500 maximum in one taxable year).
- 30% of the project costs, up to $2,000 for the heat pump water heater.
Your total claim amount would be $3,100 for one taxable year.