In December 2022, the IRS released answers regarding the improved Energy Efficiency Home Improvement and Residential Clean Energy Property Credits imposed with passage of the Inflation Reduction Act (IRA). These new credits went into effect starting January 1, 2023.
Energy Efficiency Home Improvement Credit
Previously, the Energy Efficiency Home Improvement Credit (formerly known as the “Credit for Nonbusiness Energy Property”) was a $500 lifetime credit. Upon passage of the IRA, the Energy Efficiency Home Improvement Credit was increased to a credit equal to 30% of the amount paid by the taxpayer for certain qualified expenditures. The qualifying improvements are as follows:
Previously, the Energy Efficiency Home Improvement Credit (formerly known as the “Credit for Nonbusiness Energy Property”) was a $500 lifetime credit. Upon passage of the IRA, the Energy Efficiency Home Improvement Credit was increased to a credit equal to 30% of the amount paid by the taxpayer for certain qualified expenditures. The qualifying improvements are as follows:
- Building envelope components
- Exterior doors (30% of cost, up to $250 per door. $500 aggregate limit).
- Exterior windows and skylights (30% of costs, up to $600).
- Insulation materials or systems and air sealing materials systems (30% of costs).
- Home Energy Audits (30% of costs, up to $150)
- Residential energy property (30% of costs, including labor. Each item has a $600 aggregate limit).
- Central air conditioning system.
- Natural gas, propane, or oil water heaters.
- Natural gas, propane, or oil furnaces and hot water boilers
- Improvements to/replacement of panel boards, sub-panel boards, branch circuits, or feeder that are install with the building envelope components.
- Heat pumps, biomass stoves, and biomass boilers (30% of costs, including labor
- Heat pump, or heat pump water heaters must be either electric or natural gas.
Limitations
While the credit boasts a hefty 30% credit value for some large ticket items, there are limitations to the amount of the credit available for usage. Previously, the credit qualified for only a $500 lifetime credit. However, the IRS announced that there is now a $1,200 annual aggregate limit on all building envelope components, home energy audits, and energy property, and a $2,000 annual aggregate limit on all electric or natural gas heat pumps, heat pump water heaters, and biomass stoves and boilers. Additionally, these aggregate credit limits can be used in conjunction with each other, thus maximizing the total annual credit limit to $3,200. It is worth noting that this credit can only be utilized for qualifying property paced in service on or after January 1, 2023, and before January 1, 2033
Residential Clean Energy Property Credit
The Residential Clean Energy Property Credit qualifies the taxpayer for a 30% credit on certain qualifying residential clean energy property. The following are considered qualifying property:
Unlike the Energy Efficiency Home Improvement Credit, the Residential Clean Energy Property Credit is 30% of costs, with no aggregate credit limit. However, fuel cell property expenditures are capped to $500 per ½ kilowatt capacity. Further, if the residence is jointly occupied by two or more individuals, the expenditures are capped at an aggregate total of $1,667 per ½ kilowatt between all individuals and residents. Additionally, this credit is available until 2032, at which point the credit will begin to decrease and phase out through 2034.
Qualifications and Further Limitations
Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are available to any home-owners primary residence (must meet residency test requirements). For homeowners who have second homes, these credit may be available to you, but only for certain improvements. Further, both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are available for existing homes only (to replace or improve), and will not qualify for construction in process or newly built homes.
When it comes to business or rental properties, it is worth noting that neither of these credits can be taken on a property solely used for business or as a rental residence. However, taxpayers can claim the full credit if their qualified property does not exceed 20% usage for business purposes. For properties above the 20% business usage, the credit will need to be calculated of inclusion of property allocated to non-business use.
For more information regarding these credit, visit the IRS webpage for FAQ’s on the Energy Efficient Home Improvements and Residential Clean Energy Property Credits.
As always, our accountants at Mason + Rich are ready to answer any additional questions and help guide you. Feel free to call us at 603-224-2000.
While the credit boasts a hefty 30% credit value for some large ticket items, there are limitations to the amount of the credit available for usage. Previously, the credit qualified for only a $500 lifetime credit. However, the IRS announced that there is now a $1,200 annual aggregate limit on all building envelope components, home energy audits, and energy property, and a $2,000 annual aggregate limit on all electric or natural gas heat pumps, heat pump water heaters, and biomass stoves and boilers. Additionally, these aggregate credit limits can be used in conjunction with each other, thus maximizing the total annual credit limit to $3,200. It is worth noting that this credit can only be utilized for qualifying property paced in service on or after January 1, 2023, and before January 1, 2033
Residential Clean Energy Property Credit
The Residential Clean Energy Property Credit qualifies the taxpayer for a 30% credit on certain qualifying residential clean energy property. The following are considered qualifying property:
- Solar electric property (solar panels).
- Solar water heating property (solar water heaters).
- Fuel cell property (30% of cost, up to $500 per ½ kilowatt of capacity of the qualified fuel cell)
- Geothermal heat pump property
- Battery storage technology
Unlike the Energy Efficiency Home Improvement Credit, the Residential Clean Energy Property Credit is 30% of costs, with no aggregate credit limit. However, fuel cell property expenditures are capped to $500 per ½ kilowatt capacity. Further, if the residence is jointly occupied by two or more individuals, the expenditures are capped at an aggregate total of $1,667 per ½ kilowatt between all individuals and residents. Additionally, this credit is available until 2032, at which point the credit will begin to decrease and phase out through 2034.
Qualifications and Further Limitations
Both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are available to any home-owners primary residence (must meet residency test requirements). For homeowners who have second homes, these credit may be available to you, but only for certain improvements. Further, both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit are available for existing homes only (to replace or improve), and will not qualify for construction in process or newly built homes.
When it comes to business or rental properties, it is worth noting that neither of these credits can be taken on a property solely used for business or as a rental residence. However, taxpayers can claim the full credit if their qualified property does not exceed 20% usage for business purposes. For properties above the 20% business usage, the credit will need to be calculated of inclusion of property allocated to non-business use.
For more information regarding these credit, visit the IRS webpage for FAQ’s on the Energy Efficient Home Improvements and Residential Clean Energy Property Credits.
As always, our accountants at Mason + Rich are ready to answer any additional questions and help guide you. Feel free to call us at 603-224-2000.