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A more energy-efficient home helps your wallet and the planet over the long term, reducing your energy costs and potentially improving your home’s resale value.
The idea is that upgrades to improve energy efficiency will pay for themselves over time. But still, the up-front costs of making those improvements can be steep.
The good news? You may be able to get a tax break for certain home improvement projects that make your house more efficient.
Basics of residential energy credits
“Several renewable energy tax credits have been extended under the Bipartisan Budget Act of 2018,” explains Jacob Dayan, CEO and co-founder of Community Tax. “They’ll be in effect until 2021, with a gradual step-down in credit value each year.”
In December 2018, the House of Representatives Ways and Means Committee also introduced legislation to extend other credits for energy-efficiency improvements to nonbusiness properties, but that legislation didn’t pass before Congress ended its 2018 session.
While these tax credits can be quite generous, there are strict rules and limitations for claiming them — and you need to make sure your improvements qualify.
What’s the difference between a tax credit and a tax deduction?
A tax deduction can help lower your tax bill by reducing the amount of income on which you’ll pay tax. Your income bracket can affect how much a tax deduction will save you. A tax credit is a dollar-for-dollar reduction in the amount of tax you owe.
Residential renewable-energy tax credits
What improvements qualify?
Residential renewable-energy tax credits may provide a credit valued at up to 30% of the cost of …
- Solar panels that generate electricity in a home used as a residence
- Solar-powered water heaters that perform at least half the home’s water heating in a U.S. home used as a residence
- Wind turbines that generate energy for a home used as a residence
- Geothermal heat pumps for heating and cooling a home used as a residence
- Fuel cells that generate at least 0.5 kW and have an electricity-generating efficiency of more than 30% (for fuel cells installed only in a primary home)
These credits are available for a new-construction home (once you start living in it) as well as for improvements to an existing home. And, with the exception of the fuel cell credit, they’re available for both primary and secondary homes.
How do you claim residential energy credits?
To claim your residential energy credits, you’ll need to complete IRS Form 5695. This form requires you to provide information on the costs of your solar, wind or geothermal system.
You’ll need to ensure the energy-efficient improvements meet IRS requirements to be eligible for the credit. For example, you can claim a credit for your solar water heater only if the property is certified by the nonprofit Solar Rating Certification Corporation or by a comparable entity endorsed by the state government where the property you improved is located. And at least half the energy that powers the water heater must be solar.
The instructions for IRS Form 5695 provide details on the specific requirements for each type of improvement. As these instructions explain, you can claim the credit in the year when your fuel cells, solar system, wind system or geothermal units are installed. Or if you’re having a home built or reconstructed, you can claim the credit when you first begin using the home.
The credit is nonrefundable: If it reduces the tax you owe to zero, you can’t get any remaining balance returned to you as a refund.
The total amount of residential energy credits you receive can’t exceed the amount of tax due for the year in which you claim the credit. But if you don’t owe enough to claim your full credit, you can carry the unused amount over to the next tax year.
How much are residential energy credits worth?
Residential energy credits can be quite valuable.
“You can get a hefty sum back” as a return on your investment, Dayan said.
However, the specific value of the credits varies depending upon the cost of your system, as well as how much tax you owe.
If you qualify, you can claim up to 30% of the total costs, including labor costs for preparing your property for the energy-efficiency improvements. According to the U.S. Energy Information Administration, average construction costs for solar power were $2,436 per kW in 2016, so a 10 kW system would cost around $24,360 on average. A credit equal to 30% of that cost would be worth $7,308. Remember, though, if you owe less than that amount in taxes for the year, your credit for 2018 would be capped at the amount.
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Nonbusiness energy property credits
What improvements qualify?
The nonbusiness energy credit has expired, and will not be available for your 2018 taxes unless Congress acts to renew it. If nonbusiness energy property credits are renewed for 2018 and unchanged from 2017, they could be available for certain improvements to energy efficiency. The 2018 list of eligible improvements included the following:
- Adding insulation specifically to reduce heat loss or gain
- Upgrading to energy-efficient windows, skylights or exterior doors
- Installing a metal roof with pigmented coatings or an asphalt roof with cooling granules intended to reduce a home’s heat gain
- Installing certain electrical heat-pump water heaters, central air conditioners, or heaters or stoves that use biomass
- Upgrading to a qualifying energy-efficient furnace or boiler
- Installing qualifying air-circulating fans
In 2017, these improvements could entitle you to nonbusiness energy property credits only if they were made to your primary home that you owned during the tax year.
Claiming nonbusiness energy property credits
If Congress renews the nonbusiness energy property credit for 2018, it would be claimed by completing IRS Form 5695.
To claim the credits, you must meet all qualifying criteria. This means your home must be your main, or primary, home and the improvements to energy efficiency must meet specific energy standards. If you are upgrading insulation, windows or skylights, exterior doors, or roofing, the components must be expected to last for at least five years.
How much can nonbusiness energy property credits be worth?
Nonbusiness energy property credits could be worth up to 10% of the amount paid for improvements if Congress extends them with the same qualifications and rules as the 2017 credits. But there are limits based on the specific credit. For example …
- You can take a maximum $500 credit combined for all tax years after 2005.
- You’re limited to a combined credit of $200 for windows for all tax years after 2005.
- You can claim a maximum credit of $50 for advanced main air circulating fans, $150 for a qualifying furnace or boiler and $300 for energy-efficient building property.
This lifetime cap means that if you’ve claimed at least $500 in credits in the past, you won’t be able to claim credits again in 2018, if Congress renews the credit.
Other advantages to improving the energy efficiency of your home
Earning tax credits is a good reason to improve the energy efficiency of your home, but reducing your federal taxes isn’t the only reason to act.
Better energy efficiency can lower your ongoing costs and make your home more valuable to would-be buyers. In fact, the U.S. Department of Energy estimates your property value rises $20 for each $1 in utility-bill savings when you install a solar electric system.
You may also be eligible for rebates from your utility company, as well as for state tax credits, and property tax credits to further defray up-front costs. Just be aware that you typically can’t double dip by taking a state credit and federal credit for the same improvements.
“Check your state and local websites to see if there are any additional tax credits you might qualify for,” Dayan says.
Residential energy efficient property credit is available through 2021, and Congress looks ready to extend some energy credits that expired in 2017. So if you’re thinking about installing solar power, a solar water heater, a geothermal unit or fuel cells, now is probably a good time to act. For residential energy-efficient properties, you could get tax credits valued at up to 30% of your costs, which can lead to a pretty big tax break.
Jennifer Samuel, senior tax product specialist for Credit Karma Tax®, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.