Energy Efficiency Improvement Tax Credit

The Energy Efficiency Improvement Tax Credit was recently updated when the House of Representatives Bill 5376 (”H.R. 5376”), also known as the “Inflation Reduction Act of 2022”, became law on August 16, 2022. This updated two sections of Title 26 of the United States Code. This Title of the United States Code is also known as the Internal Revenue Code. Here we are talking about 26 United States Code section 25C.

This Credit used to be called the Nonbusiness Energy Property Credit, but the Inflation Reduction Act officially updated the name to Energy Efficient Home Improvement Credit. People also call this Credit the Energy Efficiency Improvement Tax Credit.

The Energy Efficiency Improvement Tax Credit extends the Tax Credits on certain home upgrades to December 31, 2032. The Energy Efficiency Improvement Tax Credit was increased to 30 percent of the sum of Qualified Energy Efficiency Improvements and Residential or Qualified Energy Property Expenditures.

Two different types of property qualify for the Energy Efficiency Improvement Tax Credit: 1) Qualified Energy Efficiency Improvements; and 2) Residential or Qualified Energy Property.

Energy Efficiency Improvement Tax Credit – Qualified Energy Efficiency Improvements

To be considered Qualified Energy Efficiency Improvements, the upgrades must be:

1. Brand new components; and
2. Expected to remain in use for at least 5 years; and
3. Installed at the taxpayer’s Principal Residence.

“Principal Residence” is defined as a property where the taxpayer lived for an aggregate of 2 years or more during the last 5 years. Under this definition, a home would qualify as a Principal Residence if the taxpayer lived in the home for 1 month then moved away, and then moved back for six 6 months then moved away, and then moved back for seventeen 17 months. If an aggregate of twenty-four 24 months living in the home occurred during the last 5 years, the home qualifies as the Principal Residence.

Previously, the law only gave a 10% Tax Credit to Qualified Energy Efficiency Improvements. The Inflation Reduction Act has increased this Tax Credit to 30%.

The definition of Qualified Energy Efficiency Improvements has always and still includes: Exterior windows; Skylights; and Exterior doors.

The IRA added Air Sealing as now qualifying as Qualified Energy Efficiency Improvement and is now included in the Tax Credit. The IRA removed metal and asphalt roofing as a Qualified Energy Efficiency Improvement and have been removed from Tax Credit.

Limitations on Tax Credit Amounts – Qualified Energy Efficiency Improvements

The Energy Efficiency Improvement Tax Credit raised the limitations that are placed on Credits for Qualified Energy Efficiency Improvements. The law says you can claim 30% of the total price of what you paid, but then it puts limitations for the Tax Credit on certain items. So, in reality, you can claim whatever is greater between 30% of the total price or the limitation stated.

The limitation on Tax Credits for all exterior windows, skylights, and exterior doors installed in a taxable year was raised from $500 to $1,200.

The taxpayer cannot claim more than $500 for all exterior doors.

The taxpayer cannot claim more than $600 for any single window, skylight, or exterior door.

The taxpayer cannot claim more than $250 for any single exterior door.

Notice that there is no limitation on Air Sealing, which means you can claim the full 30% of the price of Air Sealing as a tax credit.

There also have been changes in the ratings and efficiency standards for qualifying Energy Efficiency Improvements, but I will not discuss the technical aspects of that in detail here.

Energy Efficiency Improvement Tax Credit – Qualified Energy Property

The Inflation Reduction Act has increased the Tax Credit for Qualified Energy Property to 30%.

The definition of Residential Energy Property has always and still includes:

1. An electric or natural gas heat pump water heater;
2. An electric or natural gas heat pump;
3. A central air conditioner;
4. A natural gas, propane, or oil water heater;
5. A natural gas, propane, or oil furnace or hot water boiler;
6. A biomass stove or boiler;
7. Any oil furnace or hot water boiler.

Advanced main circulating fans are no longer a Residential/Qualified Energy Property and have been removed from the Tax Credit.

Residential/Qualified Energy Property now includes any improvement to, or replacement of, a panelboard, sub-panelboard, branch circuits, or feeder. They must be installed in a manner consistent with the National Electric Code, have a load capacity of 200 amps or more, and be installed in conjunction with: 1) any qualified energy efficiency improvements, or 2) any qualified energy property enables the installation and use of the property.

Limitations on Tax Credit Amounts – Qualified Energy Property

The Energy Efficiency Improvement Tax Credit placed new limitations on taking Tax Credits for Residential/Qualified Energy Property. Again, the law says you can claim 30% of the total price of what you paid, but then it puts limitations for the Tax Credit on certain items. So, in reality, you can claim whatever is greater between 30% of the total price or the limitation stated.

Previously there was a limitation of $300 for all Qualified Energy Property. The Inflation Reduction Act increased this limitation to $2,000 for all heat pumps; heat pump water heaters; central air conditioners; and natural gas, propane, and oil water heaters.

Notice that there is no limitation on panelboards, sub-panelboards, branch circuits, or feeders which means you can claim the full 30% as Tax Credits for those items.

There are many changes made to the energy efficiency ratings and specifications of what qualifies as Residential/Qualified Energy Property.

Energy Efficiency Improvement Tax Credit – Home Energy Audits

The Inflation Reduction Act added a new $150 Tax Credit for Home Energy Audits. To claim this credit, the taxpayer must provide documentation and substantiation to the IRS if requested. A description of the documentation necessary has not yet been provided in the law.

Product Identification Number Requirement

After December 31, 2024, taxpayers claiming this Credit must include a “qualified product identification number” on their tax returns. The IRA sets forth a process for manufacturers of home energy efficiency products to get certified by the Secretary of the Treasury as “Qualified Manufacturers”. After December 31, 2024, taxpayers can only claim Credits on products from Qualified Manufacturers.