Washington News

On October 24, 2024, the Internal Revenue Service (IRS) released guidance on energy-efficient home improvement credits. The IRS explained the qualifications and rules for improving your home and making it more energy efficient.

The IRS released both proposed regulations and other guidance. The IRS information explains specific arrangements for the Energy Efficient Home Improvement Credit (EEHIC) and the Residential Clean Energy Credit (RCEC).

The credit generally allows homeowners a savings equal to 30% of expenses related to energy efficient improvements on their home. These improvements have a credit limit of up to $1,200 for most qualifying expenses. However, a separate credit limit of up to $2,000 is applicable for heat pumps, biomass stoves and boilers.

The credit is available if you do not have more than 20% business use of your home. This credit is scheduled to last until December 31, 2032.

The home improvements may include exterior doors, windows, skylights and insulation. The cap is $250 per door (or $500 for a maximum of two doors), $600 for windows and skylights and insulation cannot exceed the $1,200 total limit. A home energy audit qualifies for 30% credit up to $150.

Home improvement items must meet specific energy efficiency requirements. Most insulation must comply with the International Energy Conservation Code (IECC) requirements.

Examples of heating and cooling equipment includes heat pumps, air conditioners, water heaters and furnaces. These generally must meet the Consortium for Energy Efficiency (CEE) standards. Oil furnaces or hot water boilers qualify if they meet the 2021 Energy Efficiency criteria.

Labor costs can be included for installing new air-conditioners, water heaters, furnaces or heat pumps. The labor for many building improvements like windows, skylights, doors and insulation does not qualify.

The credit must be claimed in the year that improvements are installed. Components are expected to last for at least five years. You should file IRS Form 5695, Residential Energy Credits, Part II, with your tax return to claim these energy improvement credits.

The RCEC is a credit equal to 30% of the cost for solar panels, wind turbines and some battery storage systems. The 30% credit is available until 2032 and is offered at a lower level in 2033 and 2034. The RCEC may be carried forward.

Solar heating for swimming pools or hot tubs does not qualify for a credit. The RCEC solar panels, wind turbines or batteries must meet energy efficiency standards. Batteries must have a minimum capacity of three kilowatt-hours to qualify. The labor costs to install solar panels, wind turbines or batteries may also be included in the total amount qualifying for the 30% credit.

To claim the RCEC, you should file IRS Form 5695, Residential Energy Credits, Part I with your tax return.

The IRS reminds taxpayers that all qualified property must be new. Used property does not qualify for the energy credit.