The Inflation Reduction Act Changed Both Federal Energy Tax Credits (Residential Clean Energy Credit & Energy Efficient Home Improvement Credit)
This energy tax credit overview has been updated for the 2023 & 2024 tax years. The Inflation Reduction Act, among many things, made significant positive changes for 2023 and future tax years to the 2 popular federal energy tax credits that have been available for over the last decade – the Residential Energy Efficient Property Credit (25D credit) for renewable energy installations and the Non-Business Energy Property Credit (25C credit) for home energy efficiency improvements. Those credits have been renamed as the “Residential Clean Energy Credit” and the “Energy Efficient Home Improvement Credit”, respectively, their timelines have been extended, some of the eligible products have changed, and the tax credit amounts have been increased.
The Inflation Reduction Act Also Created 2 New Energy Rebate Programs
In addition to the makeover of the 2 federal energy tax credit programs, the Inflation Reduction Act also created 2 completely new energy rebate programs: the “High-Efficiency Electric Home Rebate Act (HEEHRA)” and the “HOMES (Home Owner Managing Energy Savings) Rebate Program”. Both provide significant energy cost savings for taxpayers.
There’s a lot to unpack here – and there is some serious potential home improvement and energy cost savings available to those who have a good understanding of the improved energy tax credits and new rebates – so my hope is that this doozy of an article (the longest I’ve ever written on 20somethingfinance) covers everything you need to know so you can refer back to it as a guide. Also, if you’re interested in energy efficiency and/or tax credits, check out my up-to-date breakdowns of the most-efficient vehicles, cheapest electric vehicles, federal electric clean vehicle tax credits, and state electric vehicle tax credits and rebates.
Here’s what will be covered in this article:
2023 & 2024 Residential Clean Energy Credit (the Energy Tax Credits for Renewable Energy Installations)
As part of the Inflation Reduction Act, the “Residential Energy Efficient Property Credit” that provided an energy tax credit for major renewable energy installations such as solar panel installations and wind turbines was renamed as the “Residential Clean Energy Credit”. It’s also referred to as a “25D tax credit”, in reference to the section of the tax code that it comes from. The amount of the energy credit was restored to 30% and will be in place for 2023, 2024, and through 2032, before being partially and then fully phased out. The credit amount (percentage) per year and phaseout schedule is now:
Residential Clean Energy Credit Amount (Percentage of Cost) by Year
- 2023: 30%
- 2024 – 2032: 30%
- 2033: 26%
- 2034: 22%
- 2035 (and after): 0%
The Residential Clean Energy Credit amount is unlimited (there is no cap), and in addition to equipment, it includes labor on installations.
Projects & Products Eligible for the Residential Clean Energy Credit
Projects & products that are eligible for the Residential Clean Energy Credit include:
- Solar Energy Systems (Solar Water Heaters, Solar Panels, and Photovoltaic): Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify.
- Geothermal Heat Pumps: uses the ground or ground water as a thermal energy source (to heat), or as a thermal energy sink (to cool) a home, and is ENERGY STAR certified. Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify.
- Small Wind Turbines: A qualified small wind energy property uses a wind turbine to generate electricity for use in connection with a home in the United States and used as a residence by the taxpayer. Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify.
- Fuel Cells & Microturbine Systems: the maximum credit is $500 per half kilowatt (kW) of power capacity. The fuel cell must have a nameplate capacity of at least 0.5 kW of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%. The home served by the system MUST be the taxpayer’s principal residence.
- Battery Storage Technology: qualified battery storage technology must have a capacity of not less than 3 kilowatt hours. Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify. This system must be installed in connection with a dwelling unit located in the United States and used as a residence by the taxpayer.
Battery storage technology is a new addition to the list as a result of the Inflation Reduction Act, while biomass fuel stove projects (previously eligible for this credit) were reclassified as a “Energy Efficient Home Improvement Credit” (more on that in a bit) for 2023 and beyond.
Note that these systems must be installed in connection with a dwelling unit located in the United States. A “principal residence”, for reference, is the home where you live most of the time. It can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home.
Is the Residential Clean Energy Credit Refundable?
The Residential Clean Energy Credit is a non-refundable tax credit. This means that a taxpayer claiming the credit can only use it to decrease or eliminate tax liability and will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year. A taxpayer may “carry forward” the unused amount of the Residential Clean Energy Credit to reduce tax liability in future tax years.
Are there Income Restrictions for the Residential Clean Energy Credit?
There are no income limits or phaseouts for the Residential Clean Energy Credit. As long as the installation meets other program requirements, any taxpayer can claim it.
2023 & 2024 Energy Efficient Home Improvement Credit (Formerly the “Non-Business Energy Property Credit”)
The energy tax credit previously known as the “Non-Business Energy Property Credit” has been incorrectly referred to as many names over the years…
- “Energy Property Tax Credit”
- “Non-Business Residential Energy Property Tax Credits”
- “Residential Energy Property Tax Credit”
- “Home Energy Efficiency Tax Credit”
- “Home Efficiency Tax Credit”
- “Home Improvement Energy Tax Credit”
- “Equipment Tax Credits for Primary Residences”
As part of the Inflation Reduction Act, it has a new name to get familiar with: the “Energy Efficient Home Improvement Credit”. It’s also referred to as a “25C tax credit”, in reference to the section of the tax code that it comes from. This credit has been enhanced for 2023, 2024, and through 2032.
2023 & 2024 Energy Efficient Home Improvement Credit Changes
As a result of the Inflation Reduction Act, in 2023, 2024, and through 2032, the Energy Efficient Home Improvement Credit has a number of enhancements:
- The percentage of cost eligible for the credit is higher.
- The maximum credit is higher.
- The lifetime maximum credit is removed.
- More products are now eligible (energy audits, electric panel upgrades, battery storage).
The only thing taken away versus the previous version of the credit is that roofing improvements no longer qualify for the credit.
2023 & 2024 Energy Efficient Home Improvement Credit Amount
As a result of the Inflation Reduction Act, in 2023, 2024, and through 2032, the Energy Efficient Home Improvement Credit will be equal to 30% of the costs of all eligible home improvements made during the year.
The prior $500 lifetime maximum credit limit on the total credit amount will be replaced with:
1. $1,200 combined annual maximum tax credit for the following categories of energy efficiency home improvement products, each with their own specific annual limits:
- $150 limit for qualified home energy audits.
- $250 limit for qualified exterior doors ($500 total for all exterior doors).
- $600 limit for qualified exterior windows and skylights.
- $600 limit (per item) for other qualified energy property, including central air conditioners; electric panel upgrades and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers.
- $1,200 limit for building envelope (insulation) products.
Plus:
2. $2,000 combined annual maximum tax credit limit for heat pump and heat pump water heaters; biomass stoves and boilers. This category of improvement is not limited by the $1,200 annual limit on total credits or the $600 limit on qualified energy property.
In total: a taxpayer could theoretically claim up to a $3,200 maximum annual Energy Efficient Home Improvement Credit ($2,000 for heat pump and heat pump water heaters; biomass stoves and boilers combined + $1,200 combined for everything else).
Products Eligible for the Energy Efficient Home Improvement Credit in 2023 & 2024
- Air Source Heat Pumps: 30% of cost, maximum $2,000. In general, all ducted heat pumps that have earned the ENERGY STAR label are eligible, as well as certified mini-split systems (non-ducted) with SEER2 > 16, EER2 > 12, HSPF2 > 9. Among the models that earn the ENERGY STAR Cold Climate designation, eligible systems are: ducted with EER2 > 10, mini-splits withSEER2 > 16, EER2 > 9, HSPF2 > 9.5.
- Biomass Fuel Stoves: 30% of cost, maximum $600. Must have a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel).
- Central Air Conditioning: 30% of cost, maximum $600. SEER2 ≥ 16 and all ENERGY STAR are eligible.
- Electric Panel Upgrade: 30% of cost, maximum $600. Any improvement to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeders which: 1. is installed in a manner consistent with the National Electric Code, 2. has a load capacity of not less than 200 amps, 3. is installed in conjunction with, and enables the installation and use of:
- any qualified energy efficiency improvements, or
- any qualified energy property (heat pump water heater, heat pump, central air conditioner, water heater, furnace or hot water boiler, biomass stove or boiler)
- Gas Boilers: 30% of cost, maximum $600. ENERGY STAR certified gas boilers with AFUE > 95% are eligible.
- Oil Boilers: 30% of cost, maximum $600. ENERGY STAR certified oil boilers that use certain fuels are eligible. The equipment must be rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of biodiesel, renewable diesel or second-generation biofuel.
- Gas Furnaces: 30% of cost, maximum $600. ENERGY STAR certified gas furnaces with AFUE > 97% are eligible.
- Oil Furnaces: 30% of cost, maximum $600. ENERGY STAR certified oil furnaces that use certain fuels are eligible. The equipment must be rated by the manufacturer for use with fuel blends at least 20 percent of the volume of which consists of biodiesel, renewable diesel, or second-generation biofuel.
- Gas Water Heaters: 30% of cost, maximum $600. Gas Storage Water Heaters: ENERGY STAR certified models are eligible as follows: > 0.81 UEF for tanks less than 55 gallons and > 0.86 UEF for tanks greater than or equal to 55 gallons. Tankless Water Heaters: ENERGY STAR models with > 0.95 UEF are eligible.
- Heat Pump Water Heaters: 30% of cost, maximum $2,000. ENERGY STAR are eligible for this credit.
- Home Energy Audits: 30% of cost, maximum $150. Must be conducted and prepared by a certified home energy auditor.
- Insulation/Building Envelope Products: 30% of cost, maximum $1,200. Includes batts, rolls, blow-in fibers, rigid boards, expanding spray, and pour-in-place insulation. Also, air sealing caulk, spray foam, house wrap, and weather stripping. Does not include labor/installation.
- Windows & Skylights: 30% of cost, maximum $600. Exterior windows or skylights must meet the ENERGY STAR Most Efficient criteria. Does not include labor/installation.
- Exterior Doors: 30% of cost, maximum $500 ($250 per door). Must be ENERGY STAR certified. Does not include labor/installation.
Installation prep and labor costs can be included when calculating the amount of the credit, with the exceptions of building envelope/insulation, windows and skylights, and exterior doors.
Note: for eligible home improvements using products placed in service after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the product and the taxpayer claiming the credit includes the number on his or her return for that tax year.
If you want to dig in further to any of these specific energy tax credits, the Energy Star website is a good resource.
Is the Energy Efficient Home Improvement Credit Refundable?
The Energy Efficient Home Improvement Credit is a non-refundable tax credit, similar to the Residential Clean Energy Credit. This means that a taxpayer claiming the credit can only use it to decrease or eliminate tax liability and will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year. Unlike with the Residential Clean Energy Credit, taxpayers cannot “carry forward” the unused amount of the Energy Efficient Home Improvement Credit to reduce tax liability in future tax years.
Are there Income Restrictions for the Energy Efficient Home Improvement Credit?
There are no income limits or phaseouts for the Energy Efficient Home Improvement Credit. As long as the installation meets other program requirements, any taxpayer can claim it.
How to Claim the Residential Clean Energy Credit and Energy Efficient Home Improvement Credit
If you meet eligibility criteria above for either type of energy tax credit, you must file IRS form 5695. The best tax programs and even cheapest ways to e-file will have versions of their product that will walk you through eligibility, filling out the form, and claiming the appropriate credit amount.
On to the new energy rebates…
Inflation Reduction Act Created 2 New Energy Rebate Programs: HEEHRA and HOMES
The changes to the 2 energy tax credit programs would have been significant enough on their own, however, the Inflation Reduction Act also created 2 completely new energy rebate programs: the “High-Efficiency Electric Home Rebate Act (HEEHRA)” and the “HOMES (Home Owner Managing Energy Savings) Rebate Program”. Both energy rebate programs are designed to provide point-of-sale rebates to homeowners through state governments and will roll out in early 2024. Funds will be available through September 30, 2031, at just over $4 billion per rebate program. It seems as though this funding is first-come, first-serve, so you may not want to hesitate on a project once the details roll out in your state.
High-Efficiency Electric Home Rebate Act (HEEHRA) – Home Electrification Rebates
The High-Efficiency Electric Home Rebate Act (HEEHRA) Program (Section 50122 of the Inflation Reduction Act) covers 100% of electrification project costs (up to a maximum of $14,000 per household) for low-income households and 50% of costs (up to a maximum of $14,000 per household) for moderate-income households. HEEHRA seems like the more straightforward of the 2 energy rebate programs as it specifically spells out the maximum rebate amount by product. The list may look familiar, as there is a lot of overlap with products that are on the Energy Efficient Home Improvement Credit list.
- ENERGY STAR electric heat pump water heater: up to $1,750
- ENERGY STAR electric heat pump for space heating & cooling: up to $8,000
- ENERGY STAR electric heat pump clothes dryer: up to $840
- ENERGY STAR electric stove, cooktop, range, or oven: up to $840
- Electric load service center (breaker panel): up to $4,000
- Electric wiring: up to $2,500
- Insulation, air sealing, and ventilation: up to $1,600
Eligible credit amounts vary based on household income.
- Low-income households: 100% of costs (up to amounts listed per product) are covered. Low income households are those with income that is less than 80% of the area median family income.
- Moderate-income households: 50% of costs (up to amounts listed per product) are covered. Moderate income households are those with income that is between 80% to 150% of the area median family income.
Area median income: is determined by the Department of Housing and Urban Development (HUD). Here’s HUD’s area media income database (Fannie Mae offers an area median income database off of the same data as well and it’s a bit more user friendly).
HOMES (Home Owner Managing Energy Savings) Rebate Program – Home Efficiency Rebates
The HOMES (Home Owner Managing Energy Savings) Rebate Program (Section 50121 of the Inflation Reduction Act) is a whole-house, home energy performance-based rebate that offers:
- Up to $2,000 for retrofits that are predicted to reduce energy use by 20% or more.
- Up to $4,000 for retrofits that are predicted to reduce energy use by 35% or more.
- Maximum rebates that are double for retrofits of low and moderate income homes (based on the criteria noted area median income definitions noted above): up to $4,000 for retrofits predicted to reduce energy use by 20% or more, and up to $8,000 for retrofits predicted to reduce energy use by 35% or more.
It’s unclear how this program will be administered and those details are still being worked out. My prediction is that you will need to get a certified energy audit that will list improvements and the amounts of energy savings that they are predicted to provide. If you implement those savings (whatever they may be), you are eligible for a HOMES rebate. The details are a little murky at this point. Stay tuned.
Can you Claim Both a HOMES Rebate and HEHRA Rebate for the Same Project or Product?
No, you cannot claim both a HOMES rebate and a HEHRA rebate for the same project or product. The Inflation Reduction Act, in reference to the HEEHRA rebate states:
A rebate provided by a State energy office or Indian Tribe under a high-efficiency electric home rebate program may not be combined with any other Federal grant or rebate, including a rebate provided under a HOMES rebate program (as defined in section 50121(d)), for the same qualified electrification project.
Can you Claim Both an Energy Tax Credit and an Energy Rebate for the Same Project or Product?
While you cannot claim both an HEEHRA and HOMES rebate for the same product or project, I have not seen anything definitive on whether a taxpayer might be able to claim both an energy tax credit and an energy rebate for the same product or project. Even though the energy tax credits are available for purchases right now, I will personally be waiting until the rebate programs are live before making any upgrades, just for the distinct possibility of being able to claim both. Since the rebate programs are supposed to be at point of sale, I don’t think they could be claimed retroactively for purchases made before the rules are officially rolled out (e.g. purchase made now and later claimed on a tax return).
More Resources on the Energy Tax Credits and Rebates
For more info. on these energy tax credits and energy rebates, pre and post Inflation Reduction Act, check out:
- Instructions for IRS Form 5695 – instructions on the tax form you need to fill out to claim both types of energy tax credits (currently only 2022 is available).
- Database of State Incentives for Renewables and Efficiency – should have more details on state rebate programs as the roll out.
- The Energy Star website – for more info on eligible products.
- IRS FAQs on the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit.
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