Don't Mess With Taxes

Reviewed and updated March 17, 2024

Photo by Chris F

In February 2023, Austin took another winter weather hit. A surprisingly heavy freeze ended with broken tree limbs taking out power lines, leaving tens of thousands of Austin households and businesses without electricity for days.

We were among the powerless. During the three days we sat huddled in our increasingly cold house, griping about the third consecutive and unusually cold winter (thanks, no thanks, La Niña!), we realized we needed to look into making some improvements to our house.

The energy efficient upgrades will also help in a couple of months when we're dealing with the area's usual streaks of triple-digit heat.

And thanks to some tax law changes in 2022, we'll be able to get a bit of help from Uncle Sam to pay part of the energy upgrades.

UPDATE, March 17, 2024: We did it! We replaced all but six small, decorative windows that don't open. It was exciting, trying not to run into rooms where it sounded like the removal/installation crew was taking down entire exterior walls, not just old, leaky windows. Confession: I did peak in, just to relieve my concerns. The walls were OK.

The good news is that the windows look better (inside and out views), there's still room for the shutter slats to open and close without any problems, are easier to open, and DON'T LEAK! The better news is that they are tax-credit eligible.

The best news is that while we didn't get to put up Christmas decorations last December since they would have impeded the windows' replacement, the full installation was completed just before the end of last year, allowing us to claim this tax credit on our 2023 tax return. 

Since it's St. Patrick's Day, it's a perfect time to look at how those enhanced residential energy efficiency tax breaks could make going green pay off, both in terms of monthly utility bills, and when you (we!) file your (our) taxes.

Long history of residential tax breaks: Tax benefits for making energy-efficient improvements to personal residences have been around for a while. They started in the early 1980s, but got a major boost in 2005 with the enactment that year of the Energy Policy Act. I'm pretty sure lawmakers chose the act's name so the acronym would be EPA.

The EPA provisions were renewed and added to the 2008 financial crisis bailout bill, aka the Emergency Economic Stabilization Act. They were extended and significantly expanded in 2009 as part of the Obama Administration's American Recovery and Reinvestment Act.

Since then, popular home energy improvements have, for the most part, been tweaked and renewed as part of the temporary tax breaks known as extenders.

Their latest and more expansive incarnation was on Aug. 16, 2022, when President Joe Biden signed the Inflation Reduction Act of 2022 (IRAct) into law (and yes, IRAct is my own acronym, since I always think retirement plan when I see IRA).

A major part of this new law deals with clean energy, including two amended tax credits for energy efficient home improvements and residential clean energy equipment.

Energy Efficient Home Improvement Credit: This tax break has been around for years, but now provides a larger tax benefit. Before the IRAct, this credit was called the Nonbusiness Energy Property Credit. It also had a lifetime limit of $500 in tax savings, which applied to applicable changes made through Dec. 31, 2022.

The IRAct renamed and expanded the now-dubbed Energy Efficient Home Improvement Credit so that it is worth up to $1,200 per year for qualifying changes made from Jan. 1, 2023, through Dec. 31, 2032.

The biggest benefit is the switch to an annual tax credit limit, instead of the small lifetime cap. By planning your home's energy improvements, you can spread out eligible upgrades over the tax break's 10-year life.

Of course, that means you're willing to live with a hodge-podge of old and new windows through the years. And have the patience to deal with piecemeal installations. The hubby says he'll forgo some tax savings just to get it all done at once. I agree with him. (He's saving this post just for that admission!) As noted in the update earlier in this post, we followed through in the one fell swoop replacement plan.

I also suspect a lot of folks feel the same way, and that's why Congress wrote the limits that way. If most homeowners do like we plan to, the total possible tax credit revenue hit to Treasury will be less than it could be.

But a bit of tax savings is better than nothing. And this is a tax credit. That means it reduces any tax liability dollar-for-dollar. The home energy credits can help you zero out any tax due, but they aren't refundable. As nonrefundable credits, you won't get any excess amount back as a refund.

But wiping out your tax bill, or at least reducing it, is always worth it.

And some tax savings to help with qualifying home energy efficiency improvements will make at least a bit of difference to your tax bill(s), as well as to your home's livability and re-sale value.

Qualifying residential upgrades: OK, it's time to look at what your home needs and how Uncle Sam can help you cover up to $1,200 of those energy efficient expenses.

In addition to prioritizing your home to-do list, you're also going to have to do some math.

Starting with this 2023 tax year, the Energy Efficient Home Improvement Credit is the lesser of 30 percent of the total paid for qualifying home improvements or the annual $1,200 credit limit.

In addition, the new law (like its predecessors) parses out some of the savings. While the aggregate tax credit limit is $1,200 for energy efficient upgrades, additional annual dollar credit limits apply to specific items. They are —

• $150 for home energy audits;
• $250 per door for new exterior doors, up to $500 per year;
• $600 for exterior windows and skylights, central air conditioning (A/C) units, electric panels and related equipment, natural gas, propane and oil water heaters, furnaces or hot water boilers.

If you're wondering what a home energy audit is, the IRS explains:

The audit must include an inspection of a dwelling, including condominiums and certain manufactured homes, located in the United States that is owned or used by the taxpayer as the taxpayer's principal residence. The home energy auditor must provide a written report (to the taxpayer) that identifies the most significant and cost-effective energy efficiency improvements for that dwelling, including an estimate of the energy and cost savings for each such improvement. The auditor must meet the certification or other requirements specified by the Department of the Treasury and the Internal Revenue Service in forthcoming guidance.

Also, in addition to the $1,200 energy efficiency credit limit, the new law has a separate aggregate yearly credit limit of $2,000 that applies to electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers.

The final calculation means you can claim a maximum total yearly energy efficient home improvement credit amount up to $3,200.

The Energy Efficient Home Improvement Credit is the one that will apply to our house, as we need new windows. But if you are looking to go beyond the usual home energy efficiency, check out the Residential Clean Energy tax credit.

Renewable energy credit, too: This credit also covers renewable energy options. It's worth 30 percent of qualifying expenses installed starting in 2023 through 2032.

When 2033 rolls around, the Residential Clean Energy Credit percentage rate begins phasing down. It's 26 percent for 2033, 22 percent for 2034, and the credit ending entirely on Jan. 1, 2035.

Energy upgrades that qualify for this second home energy tax credit include solar, wind, geothermal, and fuel-cell systems. Specifically, this is —

• Solar panels, or photovoltaics, for generating electricity;
• Solar-powered water heaters for water used inside the home (heating swimming pools and hot tubs doesn't count);
• Wind turbines that generate up to 100 kilowatts of electricity for residential use;
• Geothermal heat pumps that meet federal Energy Star guidelines;
• Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home; and
• Battery storage technologies.

Claiming the credit: Regardless of the extent of your residential energy saving upgrades, you'll claim those qualifying expenses on IRS Form 5695.

If you decided to go full bore into residential energy upgrades in 2023 and installed qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, biomass fuel property, and/or fuel cell property at  your residence, those cost details go in Part I of Form 5695, excerpt pictured below.

See more tax forms and more about them at Tax Forms 2024.

If you made less extensive (relatively speaking) improvements, like replacing windows, use Form 5695 Part II, excerpt pictured below, to claim those costs.

See more tax forms and more about them at Tax Forms 2024.

Form 5695 instructions — or your tax software or tax preparer — have more information to help you claim these credits on your 2023 return. Energy Star also has details on all the federal residential energy tax breaks, with links to specific improvements, like new windows.

Also check out the IRS.gov page on energy efficient home improvements and residential clean energy property credits, as well as the agency's online frequently asked questions about the credits.

You also might find these items of interest:

• PACE-ing your energy usage
• White House website has more on inflation act's energy tax breaks
• A home energy audit could produce lower utility bills and a tax credit

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