Changes To and Extension of Non-Business and Residential Energy Credits

The recently enacted Inflation Reduction Act of 2022 contains a multitude of new environmentally related tax credits that are of interest to individuals and small businesses. The Act also extends and modifies some pre-existing tax credits.

Extension, Increase, and Modifications of Nonbusiness Energy Property Credit.

Before the Act, you were allowed a personal credit for specified nonbusiness energy property expenditures. The credit applied only to property placed in service before January 1, 2022. Now you may take the credit for energy-efficient property placed in service before January 1, 2033.

Energy efficient improvements eligible for this credit include:

  • Exterior windows, skylights, and doors
    • Must be expected to last at least five years
    • Must meet Energy Star requirements
  • Home insulation
    • Must be expected to last at least five years
    • Must meet criteria established by the International Energy Conservation Code
  • Residential energy property
    • The costs (including labor) of installing new energy efficient components that heat and/or cool the air inside a home, or heat water in your home
    • The home must be used as your residence, but it doesn’t need to be your principal residence (for example: vacation home)
    • These types of improvements include:
      • Heat pumps, water heaters, central air conditions, furnaces, and hot water boilers that meet the highest efficiency tier established by the Consortium for Energy Efficiency
      • Biomass stoves and boilers with a thermal efficiency rating of at least 75%
      • Oil furnaces and hot water boilers installed from 2023 – 2026 that use certain fuel blends
      • The cost of upgrading a home electric panel or branch circuits to at least 200 amps if necessary to install qualified energy efficiency improvements or other residential energy property

Increased credit. The Act increases the credit for a tax year to an amount equal to 30% of the sum of: (a) the amount paid or incurred by you for qualified energy efficiency improvements installed in or on your home during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can’t exceed $150. (Subject to the annual limitations below).

Annual limitation in lieu of lifetime limitation. The Act also repeals the tiny $500 lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. This means you can plan to spread out improvements to save more over multiple years. In addition, there are specific annual limits for a few types of improvements:

  • Residential energy property – $600
  • Windows, and skylights – $600
  • Doors – $250 for a single exterior door, $500 total for all exterior doors
  • Amounts paid for specified heat pumps, heat pump water heaters, and biomass stoves and boilers – $2,000 (not included in the $1,200 annual limit above)

Example: In 2023, Helga Homeowner spends $1,000 to installs one Energy Star door, $5,000 to install central air conditioning, $3,000 on five Energy Star windows, and $6,000 on insulation. Her credit is as follows:

  • Door: $1,000 x 30% = $300; capped at $250
  • Central air conditioner: $5,000 x 30% = $1,500; capped at $600
  • Windows: $3,000 x 30% = $900; capped at $600
  • Insulation: $6,000 x 30% = $1,800

Her total credits equal $3,250, which is capped at the annual $1,200 limit for 2023. If she delays installing the insulation until 2024, she will get a $1,200 credit that year as well.

Extension and Modification of Residential Clean Energy Credit.

Before the Act, you were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024.

The Act extended the credit, making it available for property installed and ready for use in years before 2035. This credit can be applied to the cost of purchasing and installing the following:

  • Residential solar panels
  • Solar water heaters
  • Geothermal heat pumps
  • Small residential wind turbines
  • Residential fuel cells
  • Storage batteries

Starting in 2023, biomass fuel stoves no longer qualify for a credit.

The Act also increased the credit to 30% (from the prior 26%) of the cost of eligible property placed in service during the tax year, and has no annual or lifetime cap. This is a nonrefundable tax credit, meaning it can’t be used to reduce your tax liability below $0 for any year. If there is any unused amount in a given year, it can be carried forward to reduce your tax liability in future years.

While there isn’t enough space here to go into all the details of the credits, we hope this provides you with a useful summary. Feel free to contact our office if you have any questions about taking advantage of the new and modified credits.

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