As the cost of energy continues to rise and concerns about climate change grow, many homeowners are turning to energy efficiency upgrades not only to reduce their carbon footprint but also to save on utility bills. What many people don’t realize is that the federal government offers a variety of tax incentives to encourage these environmentally friendly improvements. Through several federal tax credit programs, you may be eligible to offset the cost of upgrades like insulation, energy-efficient windows, solar panels, heat pumps, and more.
This blog provides an in-depth look at how making your home more energy efficient can lead to valuable tax credits. We’ll cover the types of upgrades that qualify, how the tax credits work, who’s eligible, and how to claim them on your tax return.
What Are Energy Efficiency Tax Credits?
Energy efficiency tax credits are financial incentives offered by the federal government to reduce the overall cost of making energy-saving home improvements. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe dollar-for-dollar—making them even more valuable.
Two of the main residential energy tax credits currently available are:
- Energy Efficient Home Improvement Credit (IRC Section 25C)
- Residential Clean Energy Credit (IRC Section 25D)
These programs were recently enhanced and extended by the Inflation Reduction Act of 2022, providing expanded credit opportunities through at least 2032.
1. Energy Efficient Home Improvement Credit (25C)
The Energy Efficient Home Improvement Credit (previously known as the Nonbusiness Energy Property Credit) provides homeowners with a credit for installing qualifying energy-efficient products and upgrades. As of 2023, this credit was expanded and now offers:
- Up to 30% of the cost of qualifying improvements
- Annual credit limit of $1,200 per household (not lifetime cap anymore)
- Bonus credits for certain items (e.g., heat pumps qualify for an additional $2,000 cap)
Qualifying Improvements Include:
- Exterior doors (up to $250 per door, $500 total)
- Exterior windows and skylights (up to $600)
- Insulation and air sealing materials
- Central air conditioners and furnaces
- Hot water boilers
- Electrical panel upgrades related to energy improvements
- Heat pumps and biomass stoves (up to $2,000 per year)
Note: Installation costs for some items (like HVAC equipment) can be included when calculating the credit, but product-specific qualifications must be met.
2. Residential Clean Energy Credit (25D)
The Residential Clean Energy Credit is designed to reward homeowners who install renewable energy systems that generate power or heat their home. This credit is worth:
- 30% of total system costs (including labor and installation)
- Applies to tax years 2022 through 2032
- No annual or lifetime cap
Qualifying Systems Include:
- Solar electric systems (solar panels)
- Solar water heaters (must be certified by SRCC)
- Wind turbines
- Geothermal heat pumps
- Battery storage systems (starting in 2023)
- Fuel cell systems (subject to a $500 per half-kilowatt cap)
One major advantage of the Clean Energy Credit is that it has no income limitations and can be carried forward to future tax years if your credit exceeds your tax liability.
Eligibility Requirements
To claim either of these credits, you must meet the following conditions:
- The home must be your primary or secondary U.S. residence (not a rental property unless you’re using it for business and claiming a proportional credit)
- Improvements must be made to an existing home for 25C; new homes also qualify under 25D
- All products and systems must meet specific energy efficiency standards (e.g., ENERGY STAR, SEER ratings)
Always keep manufacturer certification statements and receipts for all purchases and installations, as you may be required to provide proof if audited by the IRS.
How to Claim Energy Tax Credits
You can claim these credits when you file your annual federal income tax return. Here’s how:
Step 1: Fill Out IRS Form 5695
Form 5695 is used to claim both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. Complete Part I for Clean Energy Credit and Part II for Home Improvement Credit.
Step 2: Transfer Totals to Form 1040
Once Form 5695 is completed, the final credit amount is transferred to your Form 1040, Schedule 3, and then to the main return.
Step 3: Maintain Documentation
Keep all purchase invoices, installation receipts, and any product certification statements for at least 3–7 years in case the IRS requests verification.
State and Local Energy Incentives
In addition to federal tax credits, many states and municipalities offer their own incentives, including rebates, grants, and property tax exemptions for energy-efficient upgrades. Some utility companies also provide direct rebates for the installation of energy-saving equipment like smart thermostats or efficient HVAC systems.
You can use the Database of State Incentives for Renewables and Efficiency (DSIRE) to search for local and state programs that apply to your location.
Impact on Property Value and Resale
Energy-efficient improvements don’t just offer immediate savings—they also increase the value of your home. Buyers increasingly look for homes with lower energy costs and sustainability features. Solar panels, upgraded insulation, and new HVAC systems can make your home more attractive and fetch a higher resale price.
Some lenders and appraisers now factor energy-efficient upgrades into mortgage calculations and home valuations, offering additional financial benefits to eco-conscious homeowners.
Tips for Maximizing Your Energy Tax Benefits
- Combine upgrades with available rebates to reduce upfront costs
- Plan improvements in stages to spread tax credits across multiple years
- Work with certified contractors and use qualifying products
- Track all expenses carefully, including labor and design costs where eligible
- File early to get your refund faster if credits are due
Common Mistakes to Avoid
- Assuming all energy-efficient products qualify—check eligibility first
- Missing deadlines or not filing Form 5695
- Not retaining documentation or invoices
- Confusing tax deductions with credits—they’re not the same
Working with a tax professional or using reputable tax software can help ensure you claim the correct credits and maximize your refund potential.
Conclusion: Save Money and the Planet
Making your home more energy efficient is a win-win: you help reduce environmental impact while enjoying lower utility bills and valuable tax benefits. Whether you’re planning to install solar panels, upgrade your HVAC system, or simply seal your windows and doors, there’s likely a federal tax credit waiting to help you recoup your costs. With expanded programs now in effect through 2032, homeowners have more incentive than ever to invest in sustainability—and improve their bottom line in the process.
Take advantage of these opportunities, file your taxes with care, and enjoy the financial and environmental rewards of energy-efficient living.
