Residential Energy Efficiency Tax Credit

Summary

Note: Section 13301 of The Inflation Reduction Act of 2022 (H.R. 5376) modified this tax credit and extended the expiration date. Among other changes, the bill replaced the credit’s previous $500 lifetime limit per taxpayer with an annual limit of $1,200.  

Property placed in service after 12/31/2022:

H.R. 5376 of 2022 modified the value of this tax credit, making it 30% of the cost of an item or improvement. Each item or improvement has a separate tax credit cap as shown below, and a taxpayer cannot claim more than $1,200 in total tax credits per year, except as specified. 

Building Envelope Improvements

Owners of existing homes may receive a tax credit worth 30% of the cost of upgrading the efficiency of the building's envelope. Installation (labor) costs are not included and, the improvement must meet the specified efficiency standards. The following improvements are eligible for the tax credit:

• Exterior windows and skylights: $600 maximum per year. Must meet Energy Star’s most efficient certification requirement
• Exterior doors: $250 maximum for each door, $500 maximum for all doors per year. Must meet applicable Energy Star requirements
• Insulation materials, air sealing materials, or systems designed to reduce a home's heat loss or gain: $1200 maximum per year. Must meet the prescriptive requirements established in the most recent International Energy Conservation Code

Qualified Energy Property

Taxpayers who purchase qualified residential energy-efficient property may be eligible for a tax credit. The equipment must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year in which the equipment is placed in service, and/or any additional standards specified below. The credit is equal to 30% of the cost of the equipment. Note, heat pumps, heat pump water heaters, and biomass stoves have caps that exceed the otherwise $1,200 cap for this credit:

• A natural gas or electric heat pump water heater: $2,000 maximum credit
• An electric or natural gas heat pump: $2,000 maximum credit
• A central air conditioner: $600 maximum credit
• A natural gas, propane, or oil water heater: $600 maximum credit 
• A natural gas, propane, or oil furnace or hot water boiler that meets additional requirements: : $600 maximum credit
• A biomass stove with a thermal efficiency rating of at least 75% that is used to heat a dwelling or water: $2,000 maximum credit
• Any improvement to or replacement of a panelboard, sub-panelboard, branch circuits, or feeders which is installed in accordance with the National Electric Code, has a load capacity of not less than 200 amps, is installed in conjunction with any qualified energy efficiency improvement: $600 maximum credit

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Property placed in service before 1/1/2023:

This credit applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment. Efficiency improvements or equipment must serve a dwelling in the United States that is owned and used by the taxpayer as a primary residence. The maximum tax credit for all improvements made in 2005 - 2022 is $500. The cap includes tax credits for any improvements made in any previous year. If a taxpayer claimed $500 or more of these tax credits in any previous year, any purchases made in 2006 - 2022 will be ineligible for a tax credit.

Building Envelope Improvements
Owners of existing homes may receive a tax credit worth 10% of the cost of upgrading the efficiency of the building's envelope. Installation (labor) costs are not included and the credit is capped at $500 for all improvements. To be eligible for the credit, the improvement must meet the prescriptive requirements established for it under the 2009 International Energy Conservation Code (including supplements). The following improvements are eligible for the tax credit:

• Insulation materials and systems designed to reduce a home's heat loss or gain
• Exterior doors and windows (including skylights) --- no more than $200 in total credits can be claimed for windows in years 2006 - 2016 Equipment must meet version 6.0 Energy Star program requirements.
• Pigmented metal roofs designed to reduce heat gain, and asphalt roofs with appropriate cooling granules, which are Energy Star certified.

Heating, Cooling and Water-Heating Equipment
Taxpayers who purchase qualified residential energy-efficient property may be eligible for a tax credit. The credit is equal to the full cost of the equipment up to the following caps:

• Advanced main air circulating fan: $50
• Natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization rate of 95 or greater: $150
• Electric heat pump water heater with an energy factor of at least 2.0: $300
• Electric heat pump which achieves the highest efficiency tier established by the Consortium for Energy Efficiency: $300
• Central air conditioner which achieves the highest efficiency tier established by the Consortium for Energy Efficiency: $300
• Natural gas, propane, or oil water heater which has either an energy factor of at least 0.82 or a thermal efficiency of at least 90 percent: $300
• Biomass stoves that use "plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers". Systems must have a thermal efficiency rating of at least 75 percent to qualify: $300

Background

The Energy Policy Act of 2005 established the tax credit for energy improvements to existing homes. The credit was originally limited to purchases made in 2006 and 2007, with an aggregate cap of $500 for all qualifying purchases made in these two years combined. There were also separate individual caps for the different equipment types. The Energy Improvement and Extension Act of 2008 (H.R. 1424: Div. B, Sec. 302) of 2008 reinstated the credit for 2009 purchases and made other minor adjustments. The American Recovery and Reinvestment Act of 2009 further extended the credit to include improvements made in 2010 and replaced the $500 aggregate cap with a $1,500 aggregate cap for improvements made in 2009 and 2010. This credit has since been renewed several times, but the credit was reduced to its original form and original cap of $500, only to be increased again by the Inflation Reduction Act.