TAX TIP: Tax credit for energy-efficient home renovation

As homeowners look for ways to cut costs and improve the energy efficiency of their property, the Energy Efficient Home Improvement Credit offers a tempting incentive. Available from 2023 to 2032, this tax credit can help offset the cost of improving your home’s energy efficiency. But before you plunge into the upgrade, it’s important to understand the who, what, when, and how to best use this credit to maximize its benefits.

Who qualifies

You can apply for the Energy Efficient Home Improvements Loan for improvements to your primary residence, the place where you typically spend most of your time. To qualify for the loan, the home must meet the following criteria:

• The location must be within the United States.
• It must be an existing home that you are improving or extending, not a new build.

Generally, the tax credit is only available for your primary residence. If you are a landlord or own a property that you do not live in, you are not eligible for this credit.

Commercial use of the home – If you use a property exclusively for business purposes, you are not eligible for the credit. If you use your home partially for business purposes, the credit for eligible clean energy expenses is as follows:

⦁ Business use up to 20%: full credit
⦁ Business use of more than 20%: Credit based on the proportion of expenses attributable to non-business use

Replace only what is necessary

While the idea of ​​making your entire home more energy efficient may be tempting, it’s important to remember that the energy efficiency tax credit is most beneficial when used for necessary replacements. For example, if your heater or air conditioner is nearing the end of its life, upgrading to a more energy efficient model may make sense for both your comfort and your wallet. However, if your current systems are working well, it may not make financial sense to replace them just for the tax credit.

What qualifies

Residential energy properties The product meets the highest Consortium for Energy Efficiency (CEE) efficiency level, excluding advanced levels, in effect at the beginning of the year the product is installed. It is eligible for a credit of up to $600 per product. Costs may include labor for installation.

Qualified property now includes:
⦁ Central air conditioning systems
⦁ Water heaters with natural gas, propane or oil
⦁ Natural gas, propane or oil furnaces and hot water boilers
⦁
Oil heating systems or hot water boilers can also qualify through other efficiency criteria.

Costs for electrical components needed to supply power to residential premises, including electrical panels, subpanels, branch circuits, and feeder wires, are also eligible for credit if they comply with the National Electric Code and have a capacity of 200 amps or more. A limit of $600 per item applies.

Heat pumps and biomass stoves and boilers with a thermal efficiency of at least 75% are eligible for a credit of up to $2,000 per year. Costs may include labor for installation.

Qualified improvements include:

⦁ Electric or natural gas heat pumps
⦁ Electric or natural gas heat pump water heaters
⦁ Biomass stoves and boilers

If you install solar panels on your home, you’re likely eligible for the federal Home Clean Energy Tax Credit, which covers up to 30% of the cost of installing solar panels between 2022 and 2032.

Please note the annual limits

The Energy Efficient Home Improvements Credit is not unlimited. There is a maximum annual credit of $1,200 for most home improvements and up to $2,000 for certain items like heat pumps and biomass furnaces or boilers. This annual cap means homeowners must plan their upgrades strategically. The credit has no lifetime dollar limit. You can take the maximum annual credit every year you make eligible improvements through 2033.

Instead of trying to tackle all of your improvements in one year, consider spreading them out over several years. This way, you can get the maximum credit amount each year and potentially save thousands of dollars over time. For example, in 2023, you could replace your old windows and take advantage of the $600 limit on windows and skylights. The following year, you could upgrade your insulation or install a new energy-efficient door, ensuring you stay within the annual limit while optimizing your home’s energy efficiency.

Planning for the future

The key to getting the most out of the Energy Efficient Home Improvements Loan is careful planning. Review the potential improvements your home might need over the next decade and create a timeline for implementing those improvements. By strategically staggering your improvements, you can take full advantage of the annual limits and ensure you maximize the value of the loan.

Also, keep in mind that this credit is non-refundable, meaning it can reduce your tax liability to zero, but won’t result in a refund if the credit exceeds your tax liability. So it’s important to plan your upgrades to align with your expected tax liability to get the most out of the credit.

Final thoughts

The Energy Efficient Home Improvement Tax Credit is a valuable tool for homeowners looking to make their home more energy efficient while reducing their tax bill. However, it is not a one-size-fits-all solution. Whether you are replacing a major system or simply adding insulation, a thoughtful approach will help you save money and contribute to a more sustainable future.

If you need help applying for a residential energy tax credit, contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open: Monday – Thursday, 9:00 a.m. – 5:00 p.m. Recognized as the 2023 Small Business of the Year by the Hagerstown Chamber of Commerce and on the 2024 Hagerstown Hotlist, we have been making life less taxable and more prosperous for 40 years!