As homeowners seek ways to reduce their energy bills and make their properties more sustainable, the U.S. government offers a compelling incentive in the form of energy-efficient home improvement tax credits. These tax breaks not only reward eco-conscious decisions but can also lead to significant savings on your federal tax bill. If you’re planning to upgrade your home with green technologies, it’s essential to understand how these credits work, what improvements qualify, and how to maximize your refund.
What Are Energy-Efficient Home Improvement Credits?
Energy-efficient home improvement credits are federal tax incentives designed to encourage homeowners to invest in energy-saving technologies. These credits allow you to reduce the amount of tax you owe based on qualified improvements to your primary residence. The two major categories of credits under the Inflation Reduction Act of 2022 are:
- Energy Efficient Home Improvement Credit (Section 25C)
- Residential Clean Energy Credit (Section 25D)
Both credits are available for different types of home improvements and offer generous tax savings when properly claimed.
1. Energy Efficient Home Improvement Credit (Section 25C)
This credit provides a nonrefundable credit for certain energy-efficient upgrades made to your main home, such as insulation, windows, doors, HVAC systems, and more.
Key Features:
- Annual Limit: Up to 30% of qualified expenses, with a maximum credit of $1,200 per year
- Credit Duration: Available from tax year 2023 through 2032
- Annual Limits per Component:
- $600 for qualified windows/skylights
- $500 for doors (up to $250 per door)
- $600 for qualified air conditioners, furnaces, boilers
- $150 for home energy audits
- Eligible Properties: Primary residences only (not rental or vacation properties)
Examples of Qualifying Improvements:
- Insulation materials or systems designed to reduce heat loss/gain
- Exterior doors and windows that meet ENERGY STAR® requirements
- Heat pumps, central air conditioning, natural gas furnaces or hot water boilers
- Home energy audits performed by certified professionals
Note: Labor costs for installation of insulation, windows, and doors do not qualify, but labor for HVAC systems and heat pumps does.
2. Residential Clean Energy Credit (Section 25D)
This credit supports homeowners who install clean energy systems that generate renewable power, such as solar panels and wind turbines. It replaces and extends the older Residential Energy Efficient Property Credit.
Key Features:
- Credit Amount: 30% of the cost of eligible systems, including installation
- No Annual Cap: There’s no dollar limit on the total credit amount
- Credit Duration: Available from 2022 through 2032 (phasing down afterward)
- Eligible Properties: Both primary and secondary homes qualify; rental properties do not
Examples of Qualifying Clean Energy Systems:
- Solar electric systems (solar panels)
- Solar water heaters (must be certified by the Solar Rating and Certification Corporation)
- Geothermal heat pumps
- Small wind turbines
- Battery storage systems (installed after 2022)
Unlike the Section 25C credit, labor costs for installation do count toward the total eligible expenses.
How to Claim These Credits
To claim energy-efficient home improvement credits, homeowners must complete the appropriate IRS forms when filing their tax return:
- Form 5695: Residential Energy Credits — used to calculate both the 25C and 25D credits
- Form 1040: The total credit is then applied to your individual income tax return
- Keep Documentation: Maintain receipts, manufacturer certifications, and contractor invoices for audit purposes
Eligibility Tips and Best Practices
To ensure you qualify and maximize your refund, follow these best practices:
- Make sure all products and systems meet ENERGY STAR® or other qualifying standards
- Use certified installers for HVAC, solar, and geothermal systems
- Spread improvements across multiple tax years if approaching annual credit limits
- Confirm eligibility with IRS guidelines or a qualified tax preparer
Recent Updates Under the Inflation Reduction Act
The Inflation Reduction Act of 2022 expanded and extended energy credits, increasing access and enhancing potential benefits:
- Credit amount for Section 25C was raised to 30% annually (up from prior flat limits)
- Credit eligibility now resets each year, meaning you can make improvements annually and claim the credit again
- Battery storage is now explicitly covered under Section 25D for systems installed after 2022
These changes make it more appealing than ever for homeowners to consider green upgrades to their property.
Stacking Benefits: Can You Combine Credits?
Yes, you can potentially combine Section 25C and 25D credits in the same year if you complete qualifying upgrades in both categories. For example, you might install new windows and insulation (25C) while also adding solar panels (25D), allowing you to claim multiple credits across different forms.
Impact on Refunds and Tax Liability
Because these credits are nonrefundable, they can reduce your tax liability down to zero, but they won’t generate a refund on their own if you don’t owe taxes. However, unused portions of the Residential Clean Energy Credit (25D) can be carried forward to future years, allowing you to benefit over time.
Common Mistakes to Avoid
- Claiming credits for non-qualifying products or installations
- Not saving proper documentation or certifications
- Overestimating labor costs for improvements that don’t allow labor as part of the calculation
- Assuming rental or commercial properties are eligible (most are not)
Conclusion: Invest in Your Home and Your Tax Savings
Energy-efficient home improvement credits offer a win-win opportunity—lower utility bills and valuable tax savings. Whether you’re replacing drafty windows, upgrading to a high-efficiency HVAC system, or installing solar panels, the IRS rewards homeowners who invest in sustainability.
With generous limits, expanded eligibility, and potential for long-term tax savings, now is the perfect time to plan and implement energy-saving upgrades. Be sure to document your expenses, consult ENERGY STAR® product lists, and consider talking to a tax advisor to make the most of these opportunities.
