In an era of rising energy costs and increasing environmental awareness, energy efficiency isn’t just a trend—it’s a necessity. For homeowners, making energy-efficient upgrades not only reduces utility bills and maximizes their savings but also increases the value of their homes and contributes to a greener planet.

To encourage these upgrades, the U.S. government offers federal tax credits that can significantly reduce the out-of-pocket costs for these improvements. This blog will walk you through the two main federal tax credits available in 2024: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. Let’s get started!

How Tax Credits Work for Homeowners

A tax credit is a direct reduction of the taxes you owe, unlike a tax deduction, which reduces the amount of your income that is subject to taxation. For example, if you owe $3,000 in taxes and qualify for a $1,200 tax credit, your tax liability drops to $1,800. This makes tax credits particularly valuable, as they provide a dollar-for-dollar reduction in your tax bill.

The U.S. government offers tax credits to incentivize certain behaviors, such as investing in renewable energy or improving energy efficiency in homes. By taking advantage of these credits, you can reduce your federal tax burden while making your home more energy-efficient.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit is a valuable tool for homeowners looking to reduce their energy consumption and overall energy costs. This credit is available for a wide range of home improvements, provided that the products and materials meet the energy efficiency requirements set forth by the U.S. Department of Energy. Below is a detailed look at the types of expenses that qualify and the credit amounts available.

Qualifying Expenses

To qualify for the Energy Efficient Home Improvement Credit, the following expenses must meet specific energy efficiency criteria as detailed on energy.gov:

• Exterior Doors, Windows, and Skylights
• Insulation Materials
• Central Air Conditioners, Water Heaters, Furnaces, Boilers, and Heat Pumps
• Biomass Stoves and Boilers
• Home Energy Audits

Credit Amounts

The amount of the credit you can claim depends on the total cost of the qualifying improvements made during the year of installation. The credit is calculated as a percentage of these expenses, with different rules applying for 2022 versus the years 2023 through 2032.

For 2023 through 2032, the credit remains at 30% of the total cost of qualifying improvements. However, the maximum credit you can claim each year increases to $1,200.

Notably, heat pumps, biomass stoves, and boilers have a separate, higher annual credit limit of $2,000. Unlike in previous years, there is no lifetime limit during this period, allowing homeowners to continue claiming the credit annually as they make additional improvements.

Residential Clean Energy Credit

The Residential Clean Energy Credit is a significant incentive for homeowners who invest in renewable energy systems. This credit helps offset the costs of installing clean energy solutions that reduce reliance on traditional energy sources and lower long-term utility bills.

Qualifying Expenses

To qualify, the following expenses must meet specific energy efficiency standards as outlined by energy.gov:

• Solar, Wind, and Geothermal Power Generation
• Solar Water Heaters
• Fuel Cells
• Battery Storage

Credit Amounts

The amount of the Residential Clean Energy Credit you can claim is calculated as a percentage of the total cost of your qualifying improvements made in the year of installation. Here are the applicable credit rates:

• 2022 to 2032: You can claim 30% of the total cost of qualifying clean energy systems, with no annual maximum or lifetime limit. This means that the more you invest in renewable energy solutions, the greater your potential tax savings.
• 2033: The credit rate decreases slightly to 26%, still with no annual maximum or lifetime limit. Homeowners installing clean energy systems in this year will still enjoy substantial savings, though slightly less than in previous years.
• 2034: The credit rate further decreases to 22%, again with no annual maximum or lifetime limit. While the incentive remains strong, this reduction underscores the importance of acting sooner to maximize your savings.

How to Claim Federal Tax Credits

Claiming federal tax credits for energy-efficient home improvements involves a few critical steps. Here's a straightforward guide to ensure you don't miss out on these valuable savings:

1. Keep Documentation:

Retain all receipts and invoices for the improvements you've made. This documentation is essential when claiming your tax credits. Also, obtain manufacturer certifications for eligible products. This certification is necessary to confirm that the products meet the IRS's energy efficiency requirements.

2. Use the Correct IRS Form:

To claim these credits, you'll need to complete IRS Form 5695, titled "Residential Energy Credits." This form requires you to detail the improvements made and calculate the credit you are eligible to receive. You must claim the credit for the tax year when the qualified expenses or property is installed, not merely purchased.

3. Understand the Deadlines:

Ensure that you complete the improvements within the tax year for which you're claiming the credit. File your taxes on time to avoid missing out on the credits.

4. Include the Credit in Your Tax Return:

After calculating your credit on Form 5695, transfer the credit amount to the appropriate line on your tax return. This will directly reduce your tax liability.

Claiming the Energy Efficient Home Improvement Credit

To claim the Energy Efficient Home Improvement Credit, you must make qualifying improvements to your primary residence—where you live most of the time—in the United States. This credit only applies to existing homes, whether you’re enhancing or adding onto the property. It does not apply to newly constructed homes. Additionally, if you’re a landlord or property owner who does not live in the home, you are not eligible to claim this credit.

This credit allows homeowners to claim the maximum annual credit every year that qualifying improvements are made, through 2032. However, the credit is nonrefundable, meaning it can only reduce your tax liability to zero; you cannot receive a refund if the credit exceeds the amount of tax you owe, nor can you carry over any excess credit to future tax years.

Claiming the Residential Clean Energy Credit

This credit applies to both new and existing homes in the U.S., but you must live in the home most of the year. While the credit is primarily for your primary residence, you may also claim it for certain improvements made to a second home that you live in part-time, provided you do not rent it out. However, fuel cell property claims do not apply to second homes.

Unlike the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit allows you to carry forward any unused portion of the credit to reduce your tax liability in future years. However, you cannot include any interest paid or loan origination fees in your claim.

Final Thoughts

Investing in energy-efficient upgrades isn't just about short-term savings; it's a long-term investment in your home's value, your financial well-being, and the environment. By taking advantage of federal tax credits, you can reduce the cost of these improvements, making it easier to enhance your home's energy efficiency. These credits won't last forever, so now is the time to act.