Energy credit tax savings for home improvements

Your Guide to State, Local, Federal, Estate + International Taxation

Did you make energy efficient improvements to your home last year? Purchase an energy efficient air-conditioner or water heater? Constructed a qualified renewable energy system? If so, you may qualify for energy credit tax savings for home improvements on your 2021 tax return. The COVID relief act retroactively extended the residential energy efficiency tax credits until December 31,2021 and the renewable energy credit (with updates) until December 31,2023.

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The Energy Star website details the credits available for energy efficient purchases made in 2021 and how to qualify. Prior year credit information is also available.

IRS key facts to know about residential energy efficiency tax credit expiring in 2021:

  • Part of this credit is worth 10% of the cost of certain qualified energy-saving items added to a taxpayer’s main home last year. Qualified improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. Do not include the cost to install these items.
  • This credit has a maximum lifetime limit of $500. Taxpayers may only use $200 of this limit for windows, $50 limit for any advanced main air circulating fan, $150 limit for any qualified natural gas, propane or oil furnace or hot water boiler and $300 limit for any other single residential energy-efficient building property improvement.
  • The other part of the credit is not a percentage of the cost. It includes the installation costs of certain high-efficiency heating and air-conditioning systems and high-efficiency water heaters. The credit amount for each type of property has a different dollar limit so be sure to check the Energy Star

IRS key facts to know about residential renewable energy tax credit expiring in 2023:

  • This credit now features a gradual step down in the credit value; systems which qualify are fuel cells, small wind turbines and geothermal heat pumps, solar energy systems and biomass fuel stoves (previously only having a $300 tax credit). Each having specific requirements for qualification that must be met listed on the Energy Star website.
  • This credit’s percentage step down begins at 30% for systems placed in service by 12/31/2019, going to 26% for systems placed in service after 12/31/2019 and before 01/01/2023 and currently ending with 22% for systems placed in service after 12/31/2022 and before 01/01/2024.

The residential energy efficiency credit is only available for existing homes and must be the taxpayer’s primary home to qualify for the credit. While the residential renewable energy credit is available for existing and new constructions for both primary and secondary homes. Rentals do not qualify for either credit. Be sure to have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. Taxpayers can use this to claim the credit. Do not attach it to a tax return. Keep it with tax records.

Taxpayers may claim the credit on their 2021 tax return if they didn’t reach the lifetime limit in past years. Use Form 5695, Residential Energy Credits, to claim these credits. For more information, check out the form’s instructions.

Be sure to claim your tax credit for energy efficient improvements! If you have any questions about the energy credit tax savings for home improvements, contact your Henry+Horne advisor.

Natalie Hunt