The Inflation Reduction Act of 2022 offers federal tax credits and deductions to help Americans make their homes and buildings more energy-efficient. These incentives aim to lower energy costs and reduce energy demand as the country shifts toward cleaner energy sources.
Homeowners Can Save Up to $3,200 Annually on Taxes for Energy-Efficient Upgrades
Homeowners can take advantage of federal income tax credits through 2032, which allow them to save up to $3,200 per year on energy-efficient home improvements. These credits can cover up to 30% of the costs, making upgrades more affordable.
Beyond energy efficiency credits, homeowners can also benefit from the Residential Clean Energy Credit, which has been extended and modified. This program provides a 30% income tax credit for installing clean energy systems like rooftop solar panels, wind energy systems, geothermal heat pumps, and battery storage through 2032. The credit will then gradually decrease to 22% in 2033 and 2034.
How the Tax Credits Work for Homeowners
Save Up to $2,000 on Costs of Upgrading to Heat Pump Technology
Homeowners can claim 30% of costs for eligible energy-efficient home improvements, with a maximum of $2,000. These credits can also be combined with an additional $1,200 in credits for other qualifying upgrades within a single tax year.
Air Source Heat Pumps
Heat pumps, available as ducted or ductless (mini-splits), qualify for the tax credit depending on location.
Ducted Heat Pumps
Southern Region: Must have earned the ENERGY STAR label
Northern Region: Must be labeled ENERGY STAR Cold Climate and have an EER2 rating over 10
Ductless (Mini-Split) Heat Pumps
Southern Region: Must be ENERGY STAR certified with:
SEER2 > 16
EER2 > 12
HSPF2 > 9
Northern Region: Must meet ENERGY STAR Cold Climate standards with:
SEER2 > 16
EER2 > 9
HSPF2 > 9.5
Heat Pump Water Heaters
Heat pump water heaters that meet ENERGY STAR certification qualify for the credit. To be eligible, the equipment must meet or exceed the highest efficiency tier set by the Consortium for Energy Efficiency at the beginning of the calendar year. The above requirements align with this standard.
Biomass Stoves & Boilers
Biomass stoves use biomass fuel to provide heat for homes or water heating. Acceptable fuel sources include:
Agricultural crops and trees
Wood, wood waste, and wood pellets
Plants, aquatic plants, grasses, fibers, and residues
To qualify, biomass stoves and boilers must have a thermal efficiency rating of at least 75%, calculated using the fuel's higher heating value.
Save Up to $1,200 on Energy Efficiency Home Improvements
Homeowners can receive a 30% tax credit (up to $1,200) for eligible energy property costs and energy-efficient home improvements.
Windows & Skylights
To qualify, exterior windows and skylights must meet the ENERGY STAR Most Efficient standards.
Doors
Exterior doors must be ENERGY STAR certified to qualify for the 25C Federal Tax Credit. Follow these steps to check if your door is eligible:
Use the ENERGY STAR Climate Zone Finder to determine your climate zone.
Locate the Certified Product Directory (CPD) number on your product’s label.
Enter your CPD number in the NFRC Certified Product Directory.
If your Climate Zone field has a check mark, the product is ENERGY STAR certified and qualifies for the tax credit. If there’s no check mark, it does not qualify.
Insulation
A variety of insulation products are eligible, including:
Batts, rolls, blow-in fibers
Rigid boards
Expanding spray foam
Pour-in-place insulation
Certain air-sealing products also qualify if they come with a Manufacturer’s Certification Statement, such as:
Weather stripping
Spray foam (in a can) designed for air sealing
Caulk for air sealing
House wrap
Water Heaters (Natural Gas, Oil, Propane) & Central Air Conditioners
Gas Storage Water Heaters
To qualify, ENERGY STAR certified models must meet the following standards:
Tanks under 55 gallons must have a UEF rating greater than 0.81.
Tanks 55 gallons or larger must have a UEF rating greater than 0.86.
Tankless Gas Water Heaters
Only ENERGY STAR models with a UEF rating above 0.95 are eligible.
Furnaces
To qualify, gas furnaces must be ENERGY STAR certified and have an AFUE rating of at least 97%.
Oil Furnaces
ENERGY STAR certified oil furnaces that operate on specific fuel blends are eligible. The manufacturer must certify that the furnace can run on fuel blends containing at least 20% biodiesel, renewable diesel, or second-generation biofuel.
Note: Under federal tax guidelines, eligible equipment must meet or exceed the highest efficiency tier set by the Consortium for Energy Efficiency at the start of the calendar year. The listed qualifications align with this requirement.
Boilers
Gas Boilers
Gas boilers that are ENERGY STAR certified and have an AFUE rating higher than 95% qualify for the tax credit.
Note: To be eligible under the tax code, equipment must meet or exceed the highest efficiency tier set by the Consortium for Energy Efficiency at the beginning of the calendar year. The qualifications listed align with this requirement.
Oil Boilers
Oil boilers that have ENERGY STAR certification and are designed to run on specific fuel blends qualify. The manufacturer must certify that the boiler can use fuel blends containing at least 20% biodiesel, renewable diesel, or second-generation biofuel.
Central Air Conditioners
Split systems must be ENERGY STAR certified with a SEER2 rating of 16 or higher to qualify.
Packaged systems qualify if they meet ENERGY STAR certification requirements.
Electric Panel Upgrade
An upgrade or replacement of an electrical panel, sub-panel, branch circuits, or feeders qualifies if:
Installation follows the National Electric Code.
The load capacity is at least 200 amps.
The upgrade is completed alongside or enables the installation of:
Qualified energy efficiency improvements
Qualified energy property (including heat pump water heaters, heat pumps, central air conditioners, water heaters, furnaces, biomass stoves or boilers, and hot water boilers).
Home Energy Audit
A home energy audit is an inspection that includes a written report for a primary residence. To qualify, the audit must:
Identify the most effective energy efficiency improvements for the home.
Provide estimated energy and cost savings for each improvement.
Be conducted by a certified home energy auditor.
Save 30% on Residential Clean Energy Equipment Upgrades
This tax credit applies to qualifying energy-efficient upgrades made to both existing homes and newly built homes.
Geothermal Heat Pumps
Qualified geothermal heat pump systems must meet the following criteria:
The system must use the ground or groundwater as a thermal energy source for heating or a thermal energy sink for cooling.
The equipment must be ENERGY STAR certified.
Qualified geothermal heat pump expenses include:
Costs associated with purchasing and installing the system in a home used by the taxpayer.
Small Wind Turbines
A wind turbine harnesses kinetic energy from the wind, converting it into electricity for household use.
A qualified small wind energy system:
Must generate electricity using wind power.
Must be installed in a residential home located in the United States and used by the taxpayer.
Tax credits cover both the cost of equipment and installation.
Solar Energy Systems
Solar Water Heaters
Solar water heating systems vary in design but generally consist of a collector and storage tank. They function by using solar thermal energy to heat water.
Requirements:
At least 50% of the energy used by the system must come from the sun.
The system must be certified by the Solar Rating and Certification Corporation (SRCC) or another government-endorsed entity in the state where it is installed.
Swimming pools and hot tubs are not eligible for the credit—the heated water must be used in the home.
Tax credits include installation costs.
Solar Panels (Photovoltaic Systems)
Solar panels, also known as photovoltaic (PV) systems, convert sunlight into electricity for residential use.
Requirements:
The system must supply electricity for a residence.
It must comply with fire and electrical code standards.
The home does not need to be the taxpayer’s primary residence to qualify.
Fuel Cells
Fuel cells are a key technology in the hydrogen economy, offering a cleaner and more efficient alternative to traditional gasoline and fossil fuel combustion. They have the potential to transform how energy is produced and used across the country.
Requirements
The tax credit covers installation costs.
The maximum credit available is $500 per 0.5 kilowatt (kW) of power capacity.
The fuel cell must have:
A minimum nameplate capacity of 0.5 kW of electricity is generated through an electrochemical process.
An electricity-only generation efficiency of more than 30%.
The system must be installed in the taxpayer’s primary residence.
For joint occupancy, the total eligible costs that all occupants can use to calculate the credit is $1,667 per 0.5 kW. This does not apply to married couples filing jointly. Each person can claim a credit amount based on the portion of the costs they personally paid.
Battery Storage Technology
To qualify, battery storage technology must have a minimum capacity of 3 kilowatt hours (kWh).
How to Claim the Federal Tax Credits
These tax credits are overseen by the U.S. Internal Revenue Service (IRS) and can be claimed when filing your federal income taxes for the year the home upgrades were completed. To apply for these credits, use IRS Form 5695.
Claiming the Energy Efficiency Home Improvement Credit
Homeowners can claim this credit for making energy-efficient improvements to their primary residence, where they live most of the time. The home must be located in the United States and must be an existing home, either improved or expanded. This credit does not apply to newly built homes.
Who is not eligible?
Landlords or property owners who do not live in the home cannot claim the credit.
Additional details:
There are no lifetime dollar limits, meaning homeowners can claim the maximum annual credit each year they make eligible upgrades through 2032.
The credit is nonrefundable, so the amount claimed cannot exceed the taxes owed for the year.
Unused credits cannot be carried forward to future tax years.
Claiming the Residential Clean Energy Credit
If you install renewable energy systems in your home, such as solar panels, wind energy, geothermal systems, fuel cells, or battery storage technology, you may be eligible for the Residential Clean Energy Credit. This credit covers 30% of the cost for qualified systems installed between 2022 and 2032.
The credit drops to 26% for systems installed in 2033.
The credit reduces to 22% for systems installed in 2034.
Who is eligible?
Homeowners can claim this credit for their primary residence (where they live most of the year).
The credit applies to both new and existing homes in the United States.
Landlords or property owners who do not live in the home cannot claim this credit.
Homeowners who live there part-time and do not rent their second homes may be able to claim a credit for renewable energy improvements made to it.
Fuel cell tax credits are not available for second homes.
Additional details:
If the credit exceeds the tax owed, any unused portion can be carried forward to future tax years.
Interest costs, such as loan origination fees, cannot be included in the credit.
Strategies to Maximize Your Federal Tax Savings
Since the annual credit limits are structured over multiple years, spreading out home energy efficiency upgrades can be a smart strategy. Planning improvements carefully allows you to maximize the tax credits available each year. Below are some examples of how to take advantage of these benefits.
Example 1: Conduct an Energy Audit and Improve Insulation
A home energy audit helps identify the most effective and cost-saving energy improvements for your home. If you are considering upgrading your heating and cooling system, improving attic insulation first is recommended. This reduces air leaks, lowers energy waste, and makes your home more comfortable.
You can claim 30% of the home energy audit cost, up to $150.
You can also claim 30% of the insulation product cost, up to $1,200.
If both upgrades are done in one year, you can claim a total of $1,200.
Example 2: Upgrade Your Heating and Cooling System
After completing the upgrades in Example 1, you decide to replace your heating and cooling system to further improve efficiency. You install a qualified air-source heat pump, which is eligible for the Energy Efficient Home Improvement Credit.
You can claim 30% of the cost of this project, up to $2,000.
Combined with the $1,200 claim from Example 1, your total tax credit for the year would be $3,200, which is the maximum allowed per year.
Example 3: Replace Windows, Doors and Install a Heat Pump Water Heater
If you need to replace old windows and two exterior doors and install a heat pump water heater, you can still maximize your annual tax credit.
ENERGY STAR Most Efficient windows qualify for the credit, allowing you to claim up to $600 (30% of the product cost).
Upgrading ENERGY STAR certified exterior doors allows you to claim 30% of the product cost per door, up to $250 per door ($500 maximum per year).
Installing a qualified heat pump water heater allows you to claim 30% of the project cost, up to $2,000.
By completing these home upgrades in one taxable year, you can claim a total of $3,100.
Mary Watson
