Don't Mess With Taxes

Running through a sprinkler is one way to beat the heat. Making your home more energy efficient can help, too. (Photo by MI PHAM on Unsplash)

Summer doesn't officially arrive until next week, but temperatures in much of Texas are running about 10 degrees above normal.

My fellow Lone Star Staters and I are not alone. A brutal heat wave is expected to scorch much of the southern United States through the Juneteenth holiday weekend.

The biggest worry during extreme temperatures, hot or cold, is that the public power grid will fail.

Even when utilities manage to stay operational, customers often face another challenge: exorbitant energy bills.

One way to help lower what you owe your local electric provider and relieve some stress on the overall power system is to make sure your home isn't wasting energy.

Uncle Sam can help here.

The Inflation Reduction Act of 2022 reinstated and expanded a variety of residential home energy improvement tax credits.

Here's a quick overview of these dollar-for-dollar tax breaks.

Two residential credits: There are two different credits you might be able to claim, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.

Each can be claimed for the year in which you purchase and install qualifying improvements to your property.

Homeowners who improve their primary residence will find the most opportunities to claim these tax breaks. Renters, however, may also be able to claim the credits, as well as owners of second homes used as residences.

The key in all cases is that the property to which the energy improvements are made must be used as a residence. If you use a property solely for business purposes, you can't claim either credit.

And if you use your home partly for business, you have to do some more math to claim the credit for eligible clean energy expenses.

If your property's business use is up to 20 percent, you get the full credit. If, however, you use the property more than that, your energy credit is based on share of expenses allocable to nonbusiness use.

The Internal Revenue Service has more about energy home improvements and business use of your home at a special frequently asked questions web page.

Energy Efficient Home Improvement Credit rules: The Energy Efficient Home Improvement Credit applies to the cost of making common energy upgrades to your home.

These expenses include —

• exterior doors, windows, skylights, and insulation materials;
• central air conditioners, water heaters, furnaces, boilers, and heat pumps;
• biomass stoves and boilers; and
• home energy audits.

The amount of the credit you can take is a percentage of the total allowable improvement expenses in the year of installation.

For tax years 2023 through 2032, you can claim up to 30 percent of most residential energy upgrades, up to a maximum of $1,200.

There also are separate expense limits on —

• doors, up to $250 per door and $500 total;
• windows, up to $600; and
• home energy audits, up to $150.

Water heaters, heat pumps, biomass stoves, and boilers have a separate annual credit limit of $2,000.

However, the credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033.

The credit can help reduce any tax you owe, but it is nonrefundable. So, you can't get back more on the credit than you owe in taxes.

It's also limited to the year of the energy upgrade. You can't apply any excess credit to future tax years.

Residential Clean Energy Credit rules: If you want to go beyond home energy upgrade basics, check out the Residential Clean Energy Credit.

Qualifying expenses of this second tax credit include a variety of alternative energy options, including —

• solar, wind and geothermal power generation;
• solar water heaters;
• fuel cells; and
• battery storage.

As with the energy efficient upgrades, the amount of the Residential Clean Energy Credit you can take is a percentage of the total improvement expenses in the year of installation. They are —

• 30 percent with no annual maximum or lifetime limit for 2022 to 2032;
• 26 percent for 2033; and
• 22 percent for 2034.

In all years, there is no annual maximum or lifetime limit.

How to claim the credits: Both credits are claimed on IRS Form 5695, Residential Energy Credits, which you file with your annual tax return.

Residential Clean Energy Credit claims go in Form 5695's Part I. It takes up all of page 1 of the form.

See more tax forms and more about them at Tax Forms 2023.

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Eligible expenses toward the Energy Efficient Home Improvement Credit are entered on Part II of Form 5695. That's found on page 2 of the form.

See more tax forms and more about them at Tax Forms 2023.

In either case, you must claim the credit for the tax year when the improvement is installed, not purchased.

Form 5695's instructions has details on claiming both energy tax credits. So does Energy.gov.

You also might find these items of interest:

• Save some tax green by going greener at home
• Heat pumps get special tax break in Inflation Reduction Act
• In claiming potential $7,500 EV tax credit, note delivery date & other rules

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