Home renovation can be expensive: the average project rings in at $46,748[1]. If your project involves energy efficiency, you could qualify for Energy Efficiency Tax Credits and rebates. These incentives can recoup a substantial part of your renovation costs.
| Maximum Amount | Qualifications | Type | Covered Dates | |
|---|---|---|---|---|
| Residential Energy Efficient Property Credit | 26% of costs up to total tax liability | New & existing homes, primary & secondary residences | Tax credit | Expires 12/31/2023 |
| Non-Business Energy Property Tax Credits | 10% of costs up to $ 500-lifetime limit | Existing homes and primary residences only | Tax credit | Expires 12/31/2022 |
| Residential Clean Energy Credit | 22% – 30% of costs up to tax liability | New & existing homes, primary & secondary residences | Tax Credit | 2023 – 2034 |
| Energy Efficient Home Improvement Credit | Up to 30% of costs with $1200 annual maximum | Existing homes and primary residences only | Tax credit | 2023 – 2032 |
| HOMES Rebate Program | $2000 – $8000 depending on energy savings | Minimum 20% whole-home energy savings | Rebate | 08/16/2022 – 09/30/2031 |
| High-Efficiency Electric Home Rebate Act (HEEHRA) | 50% – 80% of costs up to $14,000 | Low-income and middle-income only (up to 150% of median area income) | Rebate | 08/16/2022 – 09/30/2031 |
What Is Energy Efficiency?
🔋 Energy efficiency is defined as “the use of less energy to perform the same task or produce the same result.” For instance, a refrigerator that is energy efficient will use less electricity to keep your food cold.
Electricity isn’t the only type of energy either. Gas, oil, and propane are other types of energy. Additionally, not all items save energy in the same way.
For instance, an energy-efficient dryer may use less electricity to get your clothes dry. An energy-efficient window will keep your home cooler in the summer and warmer in the winter, helping you reduce your heating and cooling energy usage.
A product that is energy efficient often has added benefits. This can include saving money on your utility bills, reducing pollution, and increasing product longevity. For example, if your AC unit doesn’t have to run all the time, it will probably last longer.
Which Improvements Qualify?
An improvement can be energy efficient if it uses energy-efficient products or if it otherwise helps save you energy. Some potential energy-saving home improvements include:
- Window upgrades
- Solar panel installation
- AC replacement
- Skylight installation
- Installation of battery storage
- Furnace upgrades
- Door replacements
- Adding insulation
- Updating roofing
- Upgrading electric panel
- Changing the water heater
When it comes to energy efficiency tax credits and rebates, each will have its own stipulations on what is covered. Checking the guidelines and restrictions on each tax credit or rebate to ensure your renovation qualifies is critical.
Energy-Efficient Tax Credits and Rebates
There are several tax credits and rebates that homeowners can take advantage of when renovating or building their homes. With the passing of the Inflation Reduction Act, many existing credits have been expanded or replaced, and a few new programs have been created.
Regarding potential rebate/credit value, there are 6 key energy efficiency programs worth investigating.
Top 6 Energy Efficiency Credits & Rebates
1. Residential Energy Efficient Property Credit
Also known as the Renewable Energy Tax Credits, this energy efficiency program offers a variety of incentives for utilizing renewable energy sources like solar and wind.
👉 This program expires at the end of 2023 and will be replaced by the Residential Clean Energy Credit.
Which Home Improvements Qualify for the Credit?
Here are some examples of home improvements that will qualify.
- Geothermal pumps
- Residential wind turbine
- Solar water heaters
- Solar panels
- Residential fuel cells (has to be installed at primary residence)
- Biomass stoves
- Energy audits
- Doors and Windows
Except for residential fuel cells, these home improvements can be made to either a primary or secondary residence, but not rental homes or business premises.
These products must meet certain minimum energy efficiency requirements to qualify.
How Much is Covered?
Improvements made from 2020 through 2022 were supposed to be covered at 26%. However, with the passing of the Inflation Reduction Act, a 30% credit value was retroactively applied to the year 2022.
So, $10,000 in qualified home improvements in 2022 would net you a $3,000 credit. This credit is also limited by your tax liability.
✍️ This is the formula: tax liability -minus all credits = maximum Residential Energy Efficient Property Credit.
👉 For Example
Let’s say your tax liability for the year is $10,000, and you have $8,000 in other tax credits.
Even if you qualify for a $3,000 credit under this program, you would be limited to $2,000.
$10,000 – $8,000 = $2,000 max credit.
Basically, a tax credit cannot reduce your tax bill to less than zero.
How Do You Get the Money?
As this is a tax credit, you’ll need to track the costs of the home improvements and submit this value when you file your taxes at the end of the year.
The IRS provides specific instructions on calculating the amount of your credit and the appropriate form to fill out.
2. Non-Business Energy Property Tax Credits
Also referred to as the Equipment Tax Credits for Primary Residences, this program outlined credits for various energy efficiency improvements and products.
👉 This program was initially set to expire at the end of 2021, but with the passing of the Inflation Reduction Act, this credit was extended till the end of 2022. This program will be replaced in 2023 by the Energy Efficient Home Improvement Credit.
Which Home Improvements Qualify?
Here are some qualifying projects with the maximum credit for each.
- Heat pumps – max $300 credit
- AC systems – max $300 credit
- Water boiler – max credit $150,
- Furnaces & fans – max credit $150
- Water heaters – max $300 credit,
- Advanced main air circulating fan – max credit of $50
- Insulation – up to $500; installation costs not covered
- Roofing – up to $500; installation costs not covered
- Windows, doors, and skylights – up to $500, windows capped at $200; installation costs not covered
Only improvements made to an existing home that is a primary residence will qualify. New construction, secondary homes, and rentals will not qualify.
Additionally, many of these improvements have specific energy efficiency requirements.
How Much is Covered?
Only 10% of improvement costs are covered up to the maximum amount for each improvement type. I.E., the max credit allowed for AC systems is $300.
👉 There is also a $500 maximum lifetime credit. So, if you received a $300 credit in 2020, you would only have $200 remaining credit, regardless of the value of improvements made.
How Do You Get the Money?
You’ll need to submit your home improvement costs when you file your taxes at the end of the year. Because this credit has a lifetime limit, you’ll also need to track the credit amount you receive each year.
The IRS provides specific instructions on calculating the credit as well as the appropriate form to fill out.
3. Residential Clean Energy Credit
The Residential Clean Energy Credit is part of the Inflation Reduction Act passed in August of 2022. It is designed to provide tax credits to homeowners who install clean and renewable energy solutions.
👉 This credit replaces the Residential Energy Efficient Property Credit, which was originally set to expire at the end of 2023.
Which Home Improvements Qualify?
Here are some examples of qualifying projects.
- Geothermal pumps
- Residential wind turbines
- Solar panels
- Residential fuel cells
- Battery storage (does not have to be solar)
It is worth noting a few differences between this tax credit and the expiring tax credit it replaces.
Battery storage is a new addition to this credit, but solar water heaters and biomass furnaces are no longer covered under this credit. Instead, these items will now be covered under the Energy Efficient Home Improvement Credit.
How Much is Covered?
The dollar total of home improvements that will be covered depends on the year they are completed. For improvements made between 2022 and 2032, you can get a tax credit for up to 30% of your renovation costs. For 2033 up to 26% of your costs can be credited, and in 2034 this falls to 22%.
👉 Your tax liability could limit the amount of credit you qualify for. If this credit reduces your tax liability to zero, you will not get anything in excess of your tax liability.
How Do You Get the Money?
Full details on claiming this tax credit will likely not be available until tax filing season in early 2023. But considering this tax credit is replacing an existing credit, the filing process should remain the same as the process for the Residential Energy Efficient Property Credit.
4. Energy-Efficient Home Improvement Credit
This tax credit, which is part of the Inflation Reduction Act, was designed to give homeowners credit for various energy-saving home improvements.
👉 This new credit will officially replace the Non-Business Energy Property Tax Credits starting in January 2023.
Which Home Improvements Qualify?
These are some of the projects that would qualify for the energy-efficient home improvement credit.
- Exterior Doors
- Windows & skylights
- Home energy audits
- AC units
- Electrical panels
- Water heaters
- Oil furnaces
- Water boilers
- Heat pumps
- Biomass stoves
Most of these products will need to meet specific energy star requirements in order to qualify for the credit.
Also, it is worth noting that the old credit covered roofing upgrades, but this new credit will not.
How Much is Covered?
✍️ The total credit you can earn in any year is limited to $1,200. Each year, the value resets.
In addition to the general limitations, there are maximum allowed credit values on certain products/services.
- $150 for home energy audits;
- $250 for any exterior door ($500 max for all exterior doors)
- $600 for exterior windows and skylights
- $600 for other qualified energy projects (i.e., electric panels, propane water heaters, oil furnaces, etc.)
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This improvement category is not limited by the $1,200 annual limit on total credits.
How Do You Get the Money?
This credit will be issued when you file your taxes each year. Specific information on how to file for this new credit is not yet available. The credit will become effective on January 1, 2023. The first time you can claim this credit will be during the 2024 tax season.
One key filing requirement for this credit is needing a manufacturer-provided product identification number for items installed during or after 2024.
5. HOMES Rebate Program
This rebate program creates an incentive for homeowners to achieve whole-home energy savings that will save 20% on whole-house energy usage.
Which Home Improvements Qualify?
To qualify, home improvements must achieve a certain amount of whole-home energy savings. For instance, installing energy star windows and adding insulation would result in significant whole-home energy savings.
Beyond the need for whole-home energy savings, there are no specific limitations on what improvements and products qualify. Improvements covered could include solar panels, doors, insulation, and more.
Specific products used will need to meet certain energy efficiency requirements.
How Much is Covered?
The HOMES program rebate scales based on income. Additionally, the rebate amount will be based on the total estimated energy savings.
Higher Income Households:
- 20% energy savings – 50% of costs up to $2,000
- 35% energy savings – 50% of costs up to $4,000
Low-Income Households:
- 20% energy savings – 80% of costs up to $4,000
- 35% energy savings – 80% of costs up to $8,000
This rebate can also be taken by owners of rental properties based on the income of their tenants. If the majority (50 % or more) of the tenants are low to moderate income, they would qualify for the up to 80% of costs rebate.
How Do You Get the Money?
This is a rebate program, so there is no need to wait till tax time.
Specifics on how this rebate will work have not yet been released. Individual states will need to set up their own rebate programs and claim federal funds. Rebates might be point-of-sale or may require submitting claims.
💡 Since this program became official on August 16th, 2022, there may be an option to retroactively claim qualified improvements made in 2022.
6. High-Efficiency Electric Home Rebate Act (HEEHRA)
This rebate program is designed to help cover the costs of specific energy-efficient appliances and products. Specifically, this program offers a push toward electric appliances.
Which Home Improvements Qualify?
Various eclectic appliances are covered, including cooktops, clothes dryers, ovens, and more.
Other home improvements covered include:
- Heat pumps (water heater or heating/cooling)
- Electric panel upgrade
- Electric wiring
- Insulation
- Ventilation (i.e., fans)
Products and renovations will probably need to meet certain energy star or other energy efficiency requirements.
How Much is Covered?
There are specific caps for certain home renovation categories:
- $8,000 – heat pump (heating/cooling)
- $4,000 – load center
- $2,500 – electric wiring
- $1,750 – heat pump (water heater)
- $1,600 – insulation & ventilation
- $840 – electric appliances
Additionally, this rebate is income-controlled. Low-income households (those earning less than 80% of the median area income) can get up to 100% of costs rebated up to the above limitations.
Moderate-income households (those earning less than 150% of the median area income) can get 50% of their costs covered up to the above limitations.
How Do You Get the Money?
This rebate program is brand new with the passing of the Inflation Reduction Act, and few details are available on how to claim the money.
As this is a rebate, claims will be based on money spent, and you will not need to wait till tax season to submit a claim.
Other Tax Incentives and Rebates
The above 6 energy efficiency incentives are the main rebate and tax credit programs, but they are not the only ones. Below are some additional incentives that you might be able to claim.
- Clean car credit – up to $7,500 on new and $4,000 on used electric, hybrid, and fuel-cell vehicles. The credit is applied during the sale, and it has maximum income limitations.
- Energy-efficient mortgage (EEM) – this program allows you to finance energy-efficient home improvement when you purchase your home using an FHA mortgage loan.
- Weatherization Assistance Program (WAP) – offers free weatherization services to low-income households (i.e., air sealing, adding insulation, etc.).
- Local programs – many states, cities, counties, and townships have their own energy-efficiency incentive programs. This can include rebates or bill credit on your utilities. Funds for these programs are often limited (first come, first serve).
- Builders credit – if you are a home builder, there are dedicated tax credits for residential buildings.
- Commercial buildings – there are tax incentives available to those who own energy-efficient commercial buildings.
💡 You can use this tool to find a list of programs you might qualify for.
How Much Money Can You Save with Energy-Efficient Products?
With all of the tax credits, rebates, and energy savings, what do your renovation costs look like? Will your energy-efficient home improvement save you money, break even, or break the bank?
Sample Scenario
According to Forbes, one of the leading home improvement projects for 2022 is window replacement. So let’s use this as our example.
Let’s say you add/replace 5 windows, 2 doors, and 1 skylight. You choose energy star certified windows and doors with the products and installation totaling $8,000.
Under the Energy Efficient Home Improvement Credit, you’ll qualify for $1,100 in tax credit ($500 max for doors, $600 max for windows). If the renovation saves you 20% or more on your energy usage, then you can qualify for $2,000 to $4,000 in rebates.
After rebates and tax credits, you could be out of pocket as little as $2,900 (if you qualify for the $4,000 rebate). And this doesn’t include the savings you’ll see on your utility bills, which could amount to several hundred dollars a year.
You can claim a tax credit and a rebate for the same item/improvement, but you cannot claim two rebates or two tax credits for the same item.
Should You Renovate Now or Wait?
Correctly timing your renovations can greatly impact how much you’ll get back through tax credits and rebates.
Renovation Coverage
Roofing upgrades are covered under Non-Business Energy Property Tax Credits, which expire at the end of 2022. So you’ll want to get this project completed ASAP.
On the other hand, heat pumps currently have a max credit of $300 but will be covered up to $2,000 under the Energy Efficient Home Improvement Credit, which takes effect in 2023. So waiting to make this improvement might be the smarter move.
Change in Income
Energy efficiency rebates can depend on your income. The lower your income, the higher your potential rebate. So completing home improvements in years when your income is lower could be beneficial.
When it comes to tax credits, completing renovation projects in years where your tax liability is higher ensures you receive your full tax credit.
Manufacturer PIN?
Starting in 2024, the Energy Efficient Home Improvement Credit will require products to have a manufacturer-issued product identification number. So starting in 2024, you’ll have to be more careful when choosing products.
Maxed Out Credits
The Energy Efficient Home Improvement Credit allows for a $1200 credit a year. Once you’ve maxed out your credit for the year, it would be worth putting other qualifying home improvements on hold.
Diminishing Funds
The credit amounts offered by the Residential Clean Energy Credit start decreasing in 2033, and the program ends on 12/31/2034. You’ll want to complete any qualifying home improvements before these key dates.
It is also worth noting that the rebate programs have a set amount of funding. Your state and local governments may run out of money well before expiration dates.
Conclusion
While home improvements can be expensive, the government offers you several ways to recoup your cost through energy-efficient upgrades. In many cases, all it takes to get cash back is by choosing a slightly different product or filling out a little paperwork.
By using these programs, you can better plan out your future home renovations while saving a bundle of money. Just be sure to make sure your home renovations are worth the cost first.
