Residential Energy Credits - Frequently Asked Questions

Residential Energy Credits, also known as the Residential Energy Efficient Property Credit and the Nonbusiness Energy Property Credit, are tax credits available to homeowners who make qualified energy-efficient improvements to their homes. These credits provide incentives to promote energy efficiency and the use of renewable energy sources. Here's an overview of the two types of Residential Energy Credits:

1. Residential Energy Efficient Property Credit: The Residential Energy Efficient Property Credit allows homeowners to claim a credit for the installation of qualifying energy-efficient equipment, such as solar panels, solar water heaters, wind turbines, geothermal heat pumps, and fuel cells. The credit is equal to a percentage of the cost of the equipment and installation, subject to certain limits.

Key details:

• The credit is available for both principal residences and second homes.
• The credit is a percentage of the qualified expenditures, typically ranging from 22% to 30%, depending on the type of equipment and the year of installation.
• There is no maximum credit limit for most types of property, except for fuel cells, which have a maximum credit limit of $500 per half-kilowatt of capacity.
• The credit can be claimed on IRS Form 5695 and is a non-refundable credit, meaning it can reduce your tax liability but cannot result in a refund on its own.
• The credit is available through the tax year 2023, but the percentage rates may vary depending on the year of installation.

2. Nonbusiness Energy Property Credit: The Nonbusiness Energy Property Credit provides a tax credit for certain energy-efficient home improvements, such as the installation of energy-efficient windows, doors, insulation, and certain heating and cooling systems. The credit is equal to a percentage of the cost of the improvements, subject to specific limits.

Key details:

• The credit is available for improvements made to a taxpayer's primary residence.
• The credit is equal to 10% of the cost of the eligible property, up to a maximum credit limit of $500.
• There are specific dollar limits for certain types of improvements, such as $200 for windows, $150 for furnaces or boilers, and $300 for heat pumps or central air conditioning systems.
• The credit can be claimed on IRS Form 5695 and is a non-refundable credit.
• The credit was extended through the tax year 2021 but has expired after that unless further legislation extends it.

Eligibility for the Credits If you have made energy-saving improvements to your home located in the United States during 2022, you may be eligible to claim the credits.

Home Definition: The term "home" refers to the place where you resided in 2022. It encompasses various types of dwellings, including houses, houseboats, mobile homes, cooperative apartments, condominiums, and manufactured homes that comply with Federal Manufactured Home Construction and Safety Standards.

Basis Reduction: To claim the credits, you must reduce the basis (the original cost) of your home by the amount of any credit you are allowed to receive.

Main Home: Your main home is generally the residence where you primarily reside. Temporary absences due to special circumstances such as illness, education, business, military service, or vacation will not alter your main home status.

Costs: In both credits, costs are considered paid when the original installation of the item is completed. For costs related to home reconstruction, they are treated as paid when your use of the reconstructed home begins. In the case of the residential clean energy credit, costs associated with home construction are considered paid when your use of the newly constructed home begins. If an item is used for both business and nonbusiness purposes, only the portion of costs allocated to the nonbusiness use can be used to determine the credit, provided that the nonbusiness use exceeds 80%.