Through December 31, 2022, the energy efficient home improvement credit is a $500 lifetime credit. As amended by the Inflation Reduction Act (IRA), the energy efficient home improvement credit is increased for years after 2022, with an annual credit of generally up to $1,200. Beginning January 1, 2023, the amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, including:

• Qualified energy efficiency improvements installed during the year
• Residential energy property expenditures during the year, and
• Home energy audits during the year.

The following energy efficient home improvements are eligible for the Energy Efficient Home Improvement Credit:

1. Building envelope components satisfying the energy efficiency requirements:

• Exterior doors (30% of costs up to $250 per door, up to a total of $500);
• Exterior windows and skylights (30% of costs up to $600); and
• Insulation materials or systems and air sealing materials or systems (30% of costs).

2. Home energy audits (30% of costs up to $150)

3. Residential energy property (30% of costs, including labor, up to $600 for each item) satisfying the energy efficiency requirements:

• Central air conditioners;
• Natural gas, propane, or oil water heaters;
• Natural gas, propane, or oil furnaces and hot water boilers; and
• Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy property

4. Heat pumps and biomass stoves and biomass boilers (30% of costs, including labor) satisfying the energy efficiency requirements:

• Electric or natural gas heat pump water heaters;
• Electric or natural gas heat pumps; and
• Biomass stoves and biomass boilers.

There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The credit is allowed for qualifying property placed in service on or after January 1, 2023, and before January 1, 2033.

The residential clean energy property credit is a 30-percent credit for certain qualified expenditures made by a taxpayer for residential energy efficient property. The IRA extended the residential clean energy property credit through 2034, modified the applicable credit percentage rates, and added battery storage technology as an eligible expenditure. The credit applies for property placed in service after December 31, 2021, and before January 1, 2033. The credit percentage rate phases down to 26% for property placed in service in 2033, 22% for property placed in service in 2034, and no credit is available for property placed in service after December 31, 2034.

The following residential clean energy expenditures are eligible for a Residential Clean Energy Property Credit of 30% of the cost:

Solar electric property expenditures (solar panels);

Solar water heating property expenditures (solar water heaters);

Fuel cell property expenditures;

Small wind energy property expenditures (wind turbines);

Geothermal heat pump property expenditures; and

Battery storage technology expenditures.

The credits are available only for certain improvements made to second homes, and the credits are never available when the improvements are made to homes not used as a residence by the taxpayer. For example, landlords can never use these credits for improvements made to any homes they rent out but do not use as a residence themselves. However, if a taxpayer is renting a home as their principal residence and makes eligible improvements, a tax credit may be available to such tenant.

Under the Energy Efficient Home Improvement Credit: a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home or for an addition to or renovation of an existing home, and not for a newly constructed home.

Under the Residential Clean Energy Property Credit: a taxpayer can claim the credit for qualifying expenditures incurred for either an existing home or a newly constructed home.

For both credits, if a taxpayer uses property solely for business purposes, the property will not qualify for the credit. A taxpayer who qualifies for the credits and whose use of the qualified property for business purposes is not more than 20 percent may claim the full credit. For a taxpayer who otherwise qualifies for the credits, but whose use of the qualified property for business purposes exceeds 20 percent, the taxpayer must calculate the amount of credit by including only that portion of the expenditures for the property that are properly allocable to use for nonbusiness purposes.

When calculating the Energy Efficient Home Improvement Credit, a taxpayer may include the labor costs for the onsite preparation, assembly, or original installation of residential energy property such as central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; or improvements to panelboards, sub-panelboards, branch circuits, or feeders. In contrast, a taxpayer may not include the labor costs for qualified energy efficient building envelope components including a qualifying insulation material or system, exterior window, skylight, or exterior door. Thus, for an energy efficient building envelope component for which a taxpayer pays a fixed price, the taxpayer must make a reasonable allocation between the qualifying cost of the property and the nonqualifying labor cost of the installation.

When calculating the Residential Clean Energy Property Credit, a taxpayer may include the labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the qualifying property to the home.

In the case of building envelope components for which an Energy Efficient Home Improvement Credit is available (exterior doors, windows, skylights, insulation and air sealing materials or systems), the component must reasonably be expected to remain in use for at least 5 years.

There is no lifetime limit for either credit; the limits for the credits are determined on a yearly basis. For example, beginning in 2023, a taxpayer can claim the maximum Energy Efficient Home Improvement Credit allowed every year that eligible improvements are made.

Under the Energy Efficient Home Improvement Credit: a taxpayer may not carry the credit forward. Thus, if a taxpayer does not have sufficient tax liability to claim all or a portion of the credit in the year in which the related property for which the qualifying expenditure is placed in service, the unused amount of the credit may never be claimed.

Under the Residential Clean Energy Property Credit: a taxpayer may carry forward the unused amount of the credit to reduce tax liability in future tax years. Used property is not eligible for the Energy Efficient Home Improvement Credit or the Residential Clean Energy Property Credit.

Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are nonrefundable personal tax credits. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability. A taxpayer will not receive a tax refund for any amount that exceeds the taxpayer's tax liability for the year.

A taxpayer who is subject to the AMT (alternative minimum tax) is eligible to claim both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit and may offset the AMT with those credits.

A home energy audit to qualify for the Energy Efficient Home Improvement Credit must include an inspection of a dwelling, including condominiums and certain manufactured homes, located in the United States that is owned or used by the taxpayer as the taxpayer's principal residence. The home energy auditor must provide a written report (to the taxpayer) that identifies the most significant and cost-effective energy efficiency improvements for that dwelling, including an estimate of the energy and cost savings for each such improvement. The auditor must meet the certification or other requirements specified by the Department of the Treasury and the Internal Revenue Service in forthcoming guidance.