Available Tax Credits, Rebates and Incentives on Home Energy Upgrades

If you're planning a home improvement project, the Inflation Reduction Act (IRA) could act as your coupon. 

The US Department of Energy recently announced it's accepting applications where states can now apply for funding -- money already set aside from the IRA -- to develop state rebates programs. Part of President Joe Biden's Investing in America agenda, these rebate programs are designed to encourage home efficiency upgrades by making them more affordable and therefore, lowering home energy costs.

Right now there are two federal tax credits you can claim. When the new state rebates roll out you might be able to combine state rebates and federal tax credits. In fact, you may reap more benefits by waiting for all of the IRA's incentives -- like its two rebate programs -- to take effect in late 2023 or early 2024. 

"I know there's a lot of excitement, but I wouldn't want anyone to miss out on opportunities for stacking and really maximizing the benefits they can get from this legislation," said Rebecca Foster, the CEO of VEIC, a clean energy nonprofit. 

The Inflation Reduction Act, which Congress passed in 2022, provides nearly $369 billion for renewable energy equipment and energy efficient home improvements. This money will be available for the next decade so you don't need to rush your project to take advantage of the latest home energy tax credits and incentives.   

There's a lot of planning involved with a major home improvement project such as solar panels or a heat pump and that takes time. The new IRA law allows you plenty of time to consider your projects, according to Foster.

If you're considering a future home energy upgrade, here's what tax credits and rebates will be available.

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What is the energy efficient home improvement credit?

The energy efficient home improvement credit, previously known as the nonbusiness energy property credit, can help offset the cost of qualifying home energy efficiency upgrades, reducing your overall energy usage. This provision only applies to existing homes, not new ones. 

Previously, there was a lifetime cap which is now replaced with an annual one. Starting in 2023, if you make qualifying improvements every year through 2032, you can take advantage of this credit each tax year -- worth up to $3,200 -- again and again, according to Andrew Griffith, a CPA and associate professor of accounting at Iona University. 

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"Now, you aren't confined to a lifetime limit as you make these improvements," Griffith told CNET. "You can actually enjoy the benefit of it multiple times over."

The amount you receive will depend on what improvements were made and what year they were completed in. 

• Improvements made between 2005 and 2022: Lifetime limit of $500
• Improvements made between 2023 and 2032: Annual limit of $1,200, with a separate $2,000 limit for heat pumps, heat pump water heaters, biomass stoves and biomass boilers -- $3,200 total limit.

There are also price caps on what you can claim for certain improvements, such as a $150 limit for home energy audits.  

To qualify for the incentive, improvements must meet certain energy efficiency requirements. If you're unclear if your property is covered, check with a tax professional. You can also see the Consortium for Energy Efficiency Directory of Efficient Equipment for a searchable database of qualifying equipment. Here's a look at the qualifying energy efficiency appliances, according to IRA guidance.

Receiving credits is contingent on meeting efficiency standards from the Consortium for Energy Efficiency, Energy Star requirements for doors and windows or building codes, like the International Energy Conservation Code or the National Electric Code. 

What is the residential clean energy credit

The residential clean energy credit grants residents a 30% tax credit for the purchase and installation of renewable energy equipment, like solar panels and small wind turbines.  

Eligible renewable energy equipment includes:

• Battery storage technology
• Fuel cells
• Geothermal heat pumps 
• Small wind turbines
• Solar energy systems -- panels and solar water heaters

There is no dollar limit on expenses. Homeowners can claim the 30% credit whether their project costs $20,000 or $100,000. The only price cap is for fuel cell installations -- $500 for each half kilowatt of capacity. 

(The amount you can claim will drop to 26% in 2033 and 22% in 2034, before phasing out entirely in 2035.) 

Eligible expenses include the cost of the qualifying equipment itself as well as any labor and installation costs. This provision is available to both existing and new homes. Renewable energy upgrades must meet certain efficiency requirements to qualify for the credit. 

How to claim your IRA tax credits

You can claim both of the home energy provisions on IRS Form 5695, "Residential Energy Credits."

For both credits, projects are considered part of the tax year in which they were completed. If you paid for your project in 2022, but it wasn't finished until 2023, you would then claim the credit on your 2023 income taxes (which you'd file in 2024). 

Before filing, have a record of any relevant product receipts and source documentation, like the manufacturer's certification, that the component meets energy efficiency requirements. You don't need to include these documents in your return, but Griffith says experts recommend keeping them for your records. 

"Without [source documentation], you're not going to survive an audit and the IRS could disallow the credit," Griffith said. 

The best tax software can help you identify all of your tax credits via a question-and-answer process and plug them into your return.

What rebates are included in the IRA?

The legislation also outlined two rebate programs -- the Home Energy Performance Based, Whole House Rebate (HOMES) and the High-Efficiency Electric Home Rebate -- for home energy efficiency and electrification upgrades. 

Each grant program will be administered by state energy offices according to parameters set by the Department of Energy. You likely won't be able to participate in either program until late 2023 or early 2024, according to the DOE. 

While you can't take advantage of these programs yet, you should consider how you might use them when they eventually roll out.

"Start planning now. Especially if certain households are saving up for these expenditures, they will want to be first in line to get that rebate," Dirk Wallace told CNET. Wallace is a CPA and partner at Novogradac, a certified public accounting and consulting firm. 

Both programs are designed to be point-of-sale rebates, meaning you will receive a discount upon purchase. Financial benefits will vary based on household income, the type of home energy upgrade (and its potential energy savings) as well as your state's own rules and requirements. The structure of each rebate program will look different depending on what state you live in. 

"It could be a lottery, it could be first come, first serve," Wallace said. "But, I wouldn't wait for the guidance to start planning. Line up a contractor or at least start talking to one so that when [the rebates] do roll out, you'll be ready to go purchase those appliances." 

Here's a closer look at the two programs coming down the pike.

HOMES

The HOMES rebate offers incentives to homeowners who reduce their energy usage via retrofits like insulation upgrades and HVAC installations. The rebate amount will be based on the improvement's predicted percentage of energy savings.  

The HOMES rebate will be available to both single-family and multifamily homes. The rebate amount is capped at 50% of project costs for households above 80% of the area median income. For households below 80% the area median income, the rebate amount increases to 80% of the cost.   

High-Efficiency Electric Home Rebate

The High-Efficiency Electric Home Rebate encourages low- and median-income households to electrify their homes by offering incentives for specific upgrades. This rebate will only be available to households below 150% an area's median income. There are price caps for how much you will be able to claim on each upgrade. 

• Households between 80% and 150% the area's median income: The rebate is limited to 50% of the cost for a qualified electrification project cost, up to $14,000. 
• Households below 80% the area's median income: The rebate may cover up to 100% of the cost for a qualified electrification project. 

Correction, March 17: An earlier version of this story used an incorrect name for VEIC.

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